RIO DE JANEIRO, BRAZIL – The dollar closed up 1.54 percent at R$4.58 on Wednesday afternoon, March 4th. This is its new nominal record and the 11th consecutive daily high.
The move reflects the prospect that the Central Bank may cut interest rates, following the Federal Reserve’s (US Central Bank) decision that reduced the US rate by 0.5 percentage points on Tuesday. Following the surprise cut, traders raised their bets on further interest rate cuts in Brazil as well.
The Central Bank released a note in which it said it is closely monitoring the impact of the coronavirus on financial conditions and on the Brazilian economy and that the next two weeks will allow a more accurate assessment of these effects on the inflation trajectory. With the SELIC moving to an even lower level – it is currently at 4.25 percent per year – foreigners may leave the country or simply cease to come. As a result, there will be fewer dollars in the market and at a higher price.
For Alexandre Cabral, an economist and professor at the IBMEC (Brazilian Institute of Capital Markets), the Central Bank made a technical error by signaling that it will reduce the interest rate at the next COPOM meeting.
“The drop in interest rates will not force money into the banking system. The Central Bank was not being pressured and the announcement brought no relief.”
In addition to the interest rate, investors monitored the release of the Brazilian GDP data, which recorded its weakest performance in three years in 2019, growing 1.1 percent.
“It was in line with what the market expected. It would provide a bit of relief if Paulo Guedes would explain why the GDP was not as good as what they expected,” Cabral adds.
In an attempt to bring a little relief to the dollar, the Central Bank will hold an auction worth R$1 billion at 9:30 AM, before the establishment of the PTAX. The spot dollar has soared 14.15 percent in the year, placing the real in the lead among the 33 US currency rivals for the largest losses.
Source: Exame