Neil Davies, Head of Trading at PlutusFX, takes a look at the Brazilian currency:
USD/BRL moved close to a 12-year low for the Brazilian currency, currently standing at 2.977 and moving ever nearer to the physiological rate of 3 Real’s to the dollar.
Whereas in the west we have grown use to ultra low, or even negative rates of interest, it’s a very different story in South America’s largest economy. The currency weakness has come as Brazil’s central bank lifted interest rates to a six-year high of 12.75%. The move is in place to try and control inflation, itself at a 12-year high of 7.4%.
The worldwide fall in demand for commodities has had a negative effect on what was once a much hailed BRIC economy. In January industrial production fell by 5.2%, with predictions of a retraction on the economy of 0.5% this year.
Though the battle to curb inflation will be assisted by eye-watering interest rates, the move may only help push the economy towards recession, which some analysts say is a dangerous move. Even the like of India have been cutting rates, taking the steps to drive growth. However, if the three dollar barrier is breached and holds, it’s very possible that interest rates will be pushed even higher.
They could be in Real trouble.