On Thursday, the Brazilian Real sank again after the Central Bank of Brazil decided to slow down the rollover pace of expiring currency swaps. For traders like me, this signals discomfort of the bank with the recent gains of the Brazilian Real.
The central bank announced late Wednesday it will auction about 6,300 currency swaps (down from a previous pace of 7,000 contracts per day) to roll over similar contracts that mature on July 1, 2015. The bank also signaled concerns over the possibility of reducing inflation back to 4.5 percent (the official target) by the end of 2016.
It is no surprise that the Real has been adversely affected by inflation in the last few months that has hugely eroded consumer confidence. In May this year, the inflation figure for the South American country came in at a yearly pace of 8.47 percent that was above the estimates of 8.32 percent and previous month’s reading of 8.17 percent. The worst thing is that the inflation measure since the beginning of the year has risen over 200 points.
Brazil’s woes have grown exponentially, primarily because fearful investors are pushing bond yields higher as inflation is rising with every passing day. In the last few months, the 10-year government bond yield of Brazil has risen over 100 basis points, from approximately 11.75 percent to 12.75 percent presently. Rising bond yields have made things worse — borrowing costs are more expensive and have brought a negative impact on the country’s economic activity levels.
Consumer sentiment reading for the country is no good either. In April 2015, the consumer confidence figure was at 99 and it came in at 98.7 in May (a reading below 100 represents pessimism).
Because of rising price measures, purchasing power of consumers is on the declining side and has weighed heavily on sentiment. Since the economy of Brazil is not expected to make huge inroads and believed to move slowly, the Brazilian Real should continue to weaken.