March 3, 2020 / 9:45 PM / a month ago

UPDATE 1-Brazil real slumps to new low as rate cut expectations surge

(Adds detail, comment)

By Jamie McGeever

BRASILIA, March 3 (Reuters) - Brazil’s real tumbled to another record low on Tuesday, buckling under mounting selling pressure as the country’s economic growth and interest rate outlook dimmed dramatically in the wake of the U.S. Federal Reserve’s emergency rate cut.

The Fed’s first inter-meeting rate cut since the 2008 global financial crisis gave the real and local markets a brief boost, but that relief quickly evaporated as investors started to anticipate imminent easing from Brazil’s central bank.

Interest rate futures fell sharply across the board, with the January 2021 contract, one of the most liquid, sliding to a new low of 3.815%. The benchmark Bovespa index gave up earlier gains of 2% to end the day down 1.3%.

The real traded as low as 4.5179 per dollar on Tuesday , having initially rebounded to 4.45 per dollar on news of the Fed rate cut only to fall back and close below 4.512 per dollar for the first time ever.

Alexandre Schwartsman, economist and former central bank director, said the fact that the global economy is staring down the barrel of recession means the bank’s rate-setting committee known as ‘Copom’ may follow the Fed and ease policy.

“The odds that Copom would jettison the language used in February and resume cutting ... have increased significantly,” he said in a note, adding that a quarter percentage point cut in the Selic rate to a new low of 4.00% is likely.

Others, like Carlos Kawall at Asa Bank, reckon Copom will cut by 50 basis points at its March 17-18 meeting.

Even though the real is at record lows and on a lengthy losing streak - it is down 11% against the dollar so far this year - currency traders said Brazil’s growth, interest rate and inflation outlook could weaken it further still .

If it does continue falling, the central bank may be forced to increase its recent market interventions, but this time via the sale of hard foreign exchange reserves rather than FX swaps contracts.

“The current framework is not working, so the only solution is to do larger FX interventions to break the (current) dynamics,” said a senior trader at a bank in Sao Paulo. “Keep rates on hold and sell a decent amount of dollars to stabilize the market.”

Reporting by Jamie McGeever; Editing by Sandra Maler and Alistair Bell

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