Real Declines on Mendes Comments

The major currency of Brazil, Real experienced a drop after the director of the Central Bank, Aldo Mendes damped speculation that monetary authority will be intervening to stem declines. Real went down by 0.4% and the same is currently at 2.1322 per USD. At one point of time on today, the currency rallied by around 0.6%. On the other hand, the swap rates on the contract which is due in January, 2016 experienced a drop of 1 basis point and the same is currently at 9.44%. According to the Chief Economist of Votorantim Ctvm, Roberto Padovani, the Central Bank of Brazil is currently not that worried when it comes to the pass through of a weak Real to inflation.

Mendes clearly stated that the Central Bank really cannot do a lot when it comes to the depreciation of the currency in relation with its peers. If Real would have traded differently in comparison with the other currencies, things, off course, would have been different, as mentioned by Mendes.

On 31st May, Real went down to a 4-month low figure, thereby prompting the Central Bank to intervene by selling around 17,600 currency swap contracts. The total deal was worth $877 million and it was completed to stem the decline of Real. Incidentally, this was the first intervention in the forex market since 27th March.

Alexandre Tombini, the President of the Central Bank stated that the impact of a weak Real is expected to be limited on 2nd June. In last month, Real, on a whole, went down by 6.5%, marking the biggest monthly decline since September, 2011. Investors are currently speculating that the Federal Reserve may cut down on the monetary stimulus program and on the other hand, there are signals of sputtering growth in Brazil, the largest economy of Latin America as well.

In April, the industrial production of Brazil grew by 1.8%, if compared with the value of a month earlier. This was better than the forecasts as analysts predicted a jump of 1%, as reported by the National Statistics Agency.

In an attempt to curb the inflation, the policy makers raised the target lending rate by 50 basis points on 29th May, the same being currently at 8%. This surprised many of the economists as some predicted that there will be an increase of 25 basis points for the 2nd consecutive time.