Brazilian Real Crashes on Rate Cuts, Doubts of Economic Recovery

The Brazilian real is sliding in the middle of the trading week as investors are casting doubts on the South American nation’s economic recovery. There have been signs of a recent rebound in business activity, but investors are still cautious about a dovish central bank, a resurgence in COVID-19 cases, and deteriorating relations between the US and China. Its booming commodities sector is one of the few parts of the economy that is keeping Brazil alive.

On Tuesday, the central bank slashed its benchmark interest rate by 25 basis points to a four-year low of 2%, matching market projections. With the continent’s largest economy expected to contract further in the second quarter to levels unseen since the Great Depression, policymakers thought it was necessary to support stimulus and relief efforts.
Central bank authorities anticipate higher inflation over the next two years. According to the Central Bank of Brazil, inflation is expected to rise by 3% and 3.5% in 2021 and 2022, respectively. This would be about double the current inflation rate of 1.6%.
Overall, officials do not expect any tapering of monetary stimulus for the next couple of years.
On the data front, retail sales advanced 8% in June, beating the median estimate of 5.4%. This is down from the 14.4% spike in May. Business confidence climbed to 57 in August, up from 47.6 in July – anything above 50 indicates expansion.
The real has stabilized since crashing to an all-time low against the greenback, strengthening nearly 7%. However, the real has witnessed some weakness over the last week, slumping about 3.5%. Traders are sour on the central bank being more aggressive, while also concerned that ties between the US and China could further decline amid economic and geopolitical tensions.
The biggest fear, however, is the steady rise in confirmed coronavirus cases. The country recently reported more than 52,000 new cases, raising the total to 3.12 million. Brazil has 103,000 deaths. The South American nation has the second-worst case count, just behind the US with 5.25 million cases.
The USD/BRL currency pair soared 1.91% to 5.4851, from an opening of 5.3821, at 17:30 GMT on Wednesday. The EUR/BRL surged 2.34% to 6.4686, from an opening of 6.1395.
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