Historic Intervention by Brazilian Central Bank Boosts Real

At the end of the week, the Brazilian markets surprised with a remarkable recovery, supported by central bank interventions intended to curb a rapid sell-off of the national currency. The Brazilian Real approached a daily increase of 1.4% on Friday, correcting the week's losses after monetary authorities announced renewed interventions with spot sales and a credit line auction totaling $7 billion. In an unprecedented move, the central bank has intervened almost daily, executing spot-based dollar sales of $8 billion on Thursday alone—the largest daily intervention ever recorded since at least 1999. In total, the monetary measures have so far included spot sales amounting to about $17 billion. Despite these measures, the Real is currently trading 20% lower year-on-year—the worst performance among major currencies worldwide. The uncertainty over the deteriorating fiscal situation of the country has caused investors to shed Brazilian assets. The impact of the Real's decline has been felt in other asset classes, including stocks and bonds. Traders even put hedges in place against a potential sovereign default. "The real problem triggering the current market crash in Brazil is the lack of confidence in fiscal policy," stated Patrick Esteruelas, Head of Research at EMSO Asset Management. "As long as fiscal stability is not secured, growth does not cool down, or there are no new political initiatives, it will be difficult to calm the markets." Currently, Brazil's annual budget deficit amounts to 10% of GDP, significantly higher than during the first term of President Luiz Inacio Lula da Silva. Although Parliament voted for a savings plan this week, the changes made could significantly reduce the intended relief for the national budget.