Brazilian Real Weakens

Source: The Wall Street Journal

Brazil’s real weakened in early trading Tuesday as investors showed renewed concern over an economic slowdown abroad due to deteriorating investor expectations in Germany and a deceleration of activity in China.

As of 1220 GMT, the real traded at BRL1.774 to the dollar after ending at BRL1.7545 to the dollar Monday according to Tullett Prebon via FactSet.

Traders said investors are being cautious after China reported a deceleration in growth in the third quarter to 9.1% from 9.5% in the previous quarter.

Further grabbing attention was a decline in expectations in Germany as measured by the country’s ZEW investor confidence index. According to the latest reading, the index fell five points to 48.3 in October, its lowest level since late 2008.

“There’s a lot of nervousness and investors are keeping a close watch on the global outlook,” said a trader at a Sao Paulo bank.

Locally, markets remain focused on Brazil’s central bank, which will contemplate whether to make another interest rate cut at a monetary policy meeting this week.

The bank began a rate easing cycle in late August with a half percentage point rate cut, despite 12-month inflation at more than 7%. Analysts expect the bank could make another half point cut at this week’s meeting as part of a strategy to cut the reference Selic rate to as low as 11% by the end of this year.

Brazil’s recent high inflation and falling rates have been a factor in slowing incoming investment over recent weeks, though dollar flows remain strong.

Investors have also been closely watching the central bank for signs it might resume intervention if the real weakens too much. In late September the central bank began holding dollar swap auctions as a measure to alleviate some pressure on the real in the country’s futures markets.

The local monetary authority has sold more than $6 billion in swaps since Sept. 22.