The Brazilian Real: A New All-Time Low

Brazil's currency continues to depreciate in an economic and political scenario of crisis. So far this year, the currency lost 33% of its value against the greenback.

On Tuesday, the dollar broke the barrier of 4 reais per dollar, hitting a record high on renewed market concerns about the political and economic crisis hitting the government of Dilma Rousseff. The currency depreciated by around 1% to 4.03 per dollar.

This evolution reflects the global trend of appreciation of the dollar, but also on the political and economic crisis in Brazil. Last week, Dilma Rousseff announced new cuts and tax increases to eliminate the deficit of 35.000 billion reais in the 2016 budget, transforming it into a surplus of R$ 60.4 billion.

However, the measures that will be presented today need to go through Congress, hostile to the government, creating a framework of greater uncertainty.

The real fell to the lowest level since its introduction in 1994 under pressure from the difficulties facing the government to implement a plan to avoid a budget deficit amid a crisis that includes a large scandal corruption, as it was the case of Petróleo Brasileiro S.A. – Petrobras (PBR).

Economic difficulties were reflected in the draft budget for next year. The government has sent it to the parliament earlier this month and for the first time in the history of Brazil, a deficit of about 8.5 billion dollars or 0.5% of Gross Domestic Product is projected. As a result, a couple of days ago, the rating agency Standard & Poor's stripped Brazil investment grade.

The gloomy economic outlook also includes a forecast of a recession that will last at least two years. For 2015, the government expects the economy to contract about 1.5% although the market believes it can reach 3%. Meanwhile, inflation is approaching double digits, more than twice the official target, unemployment continues to rise, and Dilma Rousseff 's popularity is at a record low for a president.

Economic activity in Brazil fell to 0.02 in July from the previous month and 1.89% over the same month of 2014, the Central Bank reported.

The Brazilian economy is technically in recession after falling in the first two-quarters of this year.

Published on Sep 26, 2015
By Omar Venerio
Capital Markets, Derivatives and Financial Management Professor, Master in Finance and CFA candidate. I am an independent trader of stocks and options and passionate about the stock market.

Copyrighted 2016. Content published with author's permission.

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