The USD/BRL exchange rate slipped for three consecutive days, erasing some of the recent gains as the Brazilian real imploded. On Monday morning, it dropped to 6.07, following a $17 billion intervention by the country’s central bank. It has slipped by over 3.67% from its highest level this year, forming a shooting star pattern.
Why has the Brazilian currency crashed?
The Brazilian real has plunged as the currency faces the perfect storm this year. First, the crash has coincided with that of other emerging market currencies like the Turkish lira and Chinese yuan after Donald Trump’s election. Trump has vowed to start a trade war that could hurt most countries.
He also hinted that he would impose tariffs on BRICS countries if they work to move away from the US dollar. Brazil is a key component of BRICS because of its large $2.1 trillion GDP.
The US dollar index has been in a strong rally this year as it surged to $108.50 last week, up by over 8% from the lowest level this year.
Second, the Brazilian real has plunged due to soaring government spending. While this spending has helped to supercharge the economy, it has led to a much wider deficit. The main estimate is that the deficit will jump to over $3.3 billion, increasing the debt-to-GDP ratio. The ratio stood at 84.68% in 2023.
Read more: USD/BRL: Carry trade opportunity as Fed and BCB diverge
Third, the USD/BRL pair has soared because of the country’s stubbornly high inflation due to the strong economy. The headline Consumer Price Index (CPI) rose to 4.87% in November, its highest level since September last year. It has risen sharply after bottoming at 3.69% earlier this year.
Brazil’s economic strength has caused inflation to rise, pushing the unemployment rate to a record low of 6.2%. Philip’s Curve explains this situation: Inflation rises when the jobless rate slips.
Therefore, the ongoing retreat of the USD/BRL pair happened because of a $17 billion intervention by the Brazilian central bank. Historically, currency interventions tend to be short-lived, as we have seen recently with the Japanese yen.
The central bank has also continued raising interest rates this year. On December 12, it hiked by 12.25%, the highest level since October last year. Analysts expect the bank to deliver more hikes in the coming months, making the Brazilian real more attractive to investors.
Brazil’s government bonds are offering strong returns. The ten-year government bond yield stands at 14.20%, lower than the year-to-date high of 15.50%. Similarly, the five-year yield has retreated from over 16% to 14.80%.
The government has also hinted that it will start cutting spending and implement more fiscal rules to safeguard the real.
Read more: USD/BRL forecast amid Fed and Brazil Central Bank divergence
USD/BRL analysis
The weekly chart shows that the USD to BRL exchange rate has rallied in the past few years. This surge helped to push the pair to a high of 6.3085, its all-time high last week. The pair has moved slightly above the key resistance level at 6, the highest swing in May 2020 and the last major resistance.
Most notably, it has now formed a shooting star candlestick pattern, which is characterized by a small body and a long upper shadow. This pattern is one of the most popular bearish signs in the market.
Therefore, the USD/BRL exchange rate will likely move sideways this week and then retest the support at 6. A break and retest pattern often leads to a continuation of the existing trend. As such, the long-term forecast is where the USD to BRL pair continues rising. The key point to watch will be at 6.30.
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