BRASILIA, Feb 7 (Reuters) - Brazil’s real chalked up its sixth weekly decline in a row on Friday, hitting a record low under 4.30 per dollar as traders tested the central bank’s resolve to refrain from intervening in the market to stop the slide.
With market volatility still relatively contained and other emerging currencies around the world also falling, the central bank did not show its hand, paving the way for the real’s longest losing streak since the middle of last year.
That six-week decline ended when the central bank eventually acted in late August, wading into the spot market selling dollars outright for the first time in over a decade. It repeated the dose in late November too.
With no such action this time around, the real traded as low as 4.3234 per dollar on Friday. That marks a remarkable 2.5% fall from 4.21 from just the previous day, when it initially rallied on the back of the central bank’s signal on Wednesday that its latest interest rate cut would be its last.
Brazil’s currency is down 7% so far this year, one of the worst-performing emerging market currencies in the world. Despite the more supportive interest rate environment, it remains on the defensive.
“We would have thought that this (central bank signal) should be BRL-positive. We had also expected that the inflows from scheduled asset sales would be BRL-supportive,” Citi’s Dirk Willer and his team wrote in a client note on Friday.
“With both those potential positive triggers having come and gone ... further real downside has become more plausible, also given the lower inflation print,” they said, referring to January’s inflation data released on Friday.
Traders said speculative domestic and overseas funds were buying dollars on Friday, filling the void left by a lack of longer-term portfolio inflows from overseas investors for Brazilian assets.
While the central bank may be highly sensitive to the eventual inflationary impact of a weak exchange rate, Economy Minister Paulo Guedes has indicated he is comfortable with low interest rates and a relatively weaker real.
“It’s a new normal (but) it doesn’t mean that the dollar will always be above 4.00 reais,” Guedes said on Jan. 20.
The dollar has been above 4.00 reais every day since. (Reporting by Jamie McGeever; editing by John Stonestreet and Nick Macfie)