(Bloomberg) -- Brazil took extraordinary measures on Tuesday to stem a collapse in its currency that’s quickened in recent weeks as investor concern mounted about the government’s soaring budget deficits.
In the latest of a series of aggressive moves, the central bank sold over $3 billion in local markets in back-to-back auctions, in its fourth intervention in three days. The maneuver halted a sharp selloff that’s pushed the real down more than 20% this year to a record low, the most among major currencies.
The weakness that has engulfed the real recently is now spreading across assets, with Brazil’s government dollar bonds leading losses in emerging markets. Brad Bechtel, global head of FX at Jefferies, called the rout a “train wreck” that the bank is trying to contain.
“There is little they can do to stop it until the government steps up and does the right thing on the fiscal,” he said.
Investors have grown increasingly skeptical of the government’s pledges to shore up public accounts and address the country’s debt trajectory. President Luiz Inacio Lula da Silva last month unveiled new income tax breaks alongside a plan to cut 70 billion reais ($11.5 billion) in spending, disappointing traders who saw it as the latest sign that the leftist leader remains more focused on boosting growth than bolstering the fiscal outlook.
Central bankers led by Roberto Campos Neto lifted interest rates by a full percentage point to 12.25% this month, pledging two additional hikes of similar magnitude by March. Policymakers see their battle against inflation turning “more adverse” as both current price pressures and expectations for future consumer price increases accelerate.
They pointed to the weaker real as one of the reasons why their inflation fight has become more challenging, according to minutes from their Dec. 10-11 rate decision. The board will monitor “closely” the pass through to prices, they added.
Fiscal Bills
The currency finished the session 0.4% higher against the US dollar in Sao Paulo, reversing losses after weakening as much as 1.2% earlier on the day. The advance gained some support after Brazil’s lower house added two spending-cut bills to its Tuesday voting schedule, traders in local markets said.
In two separate auctions on Tuesday, the central bank sold $1.27 billion shortly after the start of the session and then $2 billion more a couple of hours later. The auctions followed similar maneuvers on Friday and Monday.
The moves are still “fig-leaves”, said Alejandro Cuadrado, head of global FX and Latin America strategy at Banco Bilbao Vizcaya Argentaria SA.
“It’s fiscal commitment that is needed to prevent Brazilian markets spinning. And likely beyond what’s being discussed forever in Congress. Historically FX interventions have had limited success,” Cuadrado said.
--With assistance from Vinícius Andrade and Julia Leite.
(Updates with closing prices, details on congressional votes starting in second paragraph.)
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