Brazil: Real gains back ground amid improved market sentiment
The Brazilian real recovered some ground against the U.S. dollar in recent weeks, largely reflecting a turnaround in investor sentiment and higher risk appetite. On 12 June the real traded at BRL 5.05 per USD, which marked a 16.5% appreciation over the previous month. Despite this upturn, the real remained down 23.5% year-on-on year and 20.4% year-to-date.
After falling to a record low in May amid Covid-19-induced market turmoil, the currency has strengthened in the past month as countries across the globe have started to lift lockdowns and reopen their economies, improving market sentiment. Sizable global fiscal and monetary stimulus packages to curb the impact of the coronavirus and rebounding stock markets, including in Brazil, have increased demand for the real among other riskier assets. The Central Bank of Brazil further supported the real when it said there is ample room to sell foreign exchange reserves and thus stands ready to ramp up its intervention in the currency market should it be necessary.
Looking ahead, the real is currently forecast to weaken slightly from current levels. The duration of the coronavirus health crisis and elevated public expenditure to mitigate its impact will pressure the already weak fiscal accounts, weighing on the currency. Meanwhile, continued political noise could exert further downward pressure. A sustained positive external scenario poses an upside risk, however.