February 28, 2020 / 5:05 PM / a month ago

Brazil real sinks to new low despite central bank FX intervention

BRASILIA, Feb 28 (Reuters) - The Brazilian real fell to a fresh all-time low against the dollar on Friday, taking its losses so far this year to 11% as the relentless selling overwhelmed the central bank’s third consecutive daily market intervention to ease the pressure.

As growing fears over the coronavirus outbreak slammed markets and investor sentiment around the world, Brazil’s real brushed aside the central bank’s $1 billion sale of FX swaps contracts to fall through 4.51 per dollar for the first time.

Traders said local investors sold the real as a hedge against their exposure to the Brazilian stock market, while local speculators also pushed the currency lower to test the central bank’s resolve.

The real traded as low as 4.5136 per dollar, and by mid-session in Brazil on Friday it had clawed back some ground to trade at 4.4950 reais per dollar.

“When the stock market is up and the economy is accelerating, FX depreciation is ignored. But when stocks sink and the economy cools down, a weaker currency becomes a big problem,” said one senior trader in Sao Paulo. “The currency is now Brazil’s main problem.”

Brazil’s central bank dipped into the currency derivatives market on Friday for the third time this week and fifth time this month, selling $1 billion in FX swaps to slow the real’s fall.

But if it had an effect, it was only to slow the decline. Economists note that with 2020 growth forecasts being revised down, in some cases below the politically-sensitive 2% threshold, it might be difficult for the real to bounce back meaningfully even when it does recover.

“The real was underperforming its emerging market peers even before concerns about (coronavirus) intensified in late January,” wrote William Jackson at Capital Economics in a note on Friday.

“We think a lot of this can be explained by Brazil’s widening current account deficit, which will keep the currency under pressure even if virus fears fade,” he said. (Reporting by Jamie McGeever; Editing by David Gregorio)

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