After seeing the Brazilian real reach a new 4 year low and economists raised their year-end forecast on inflation to 5.80% from 5.74% for the end of this year, the Brazilian Central Bank knew it needed to act. Last week Brazilian officials announced that they will intervene with $60 billion in swap contracts. The bank will auction $1 billion in loans every week on each Friday for the rest of the year.
Currency swap rates are typically used by institutional players and they will allow traders to exchange bonds indexed to domestic interest rates for bonds in U.S. dollar terms. The importance of Brazil’s central bank decision to use currency swaps provides some fear for Brazilian real sellers as the bank left the door open for further intervention using its excess of 374 billion in reserves.
Emerging market countries that have growing current account deficits are all in trouble in seeing further domestic currency depreciation, but investors may choose to join the bandwagon of shorting the rupee, rupiah and lira over Brazil’s real in fear that this central bank may act in the FX market more effectively.
Price action on the weekly chart highlights last week’s rise to a 4-year high on USD/BRL and a potential bearish ABCD and double top pattern. The recent breakout coincides with the key collapse among several emerging market currencies. The sharp pullback that started last Thursday however has quickly erased almost 38% of its gains after a report today showed that the U.S. manufacturing remains tepid and the recovery could be threatened as new factory orders for durable dropped 7.3%, quite the difference than the prior readings positive 3.9% surge.
Despite the Brazilian efforts to slow down this depreciation, the US dollar trend is firmly valid. If price continues to consolidate and has a tentative touch of our trendline around the 2.32 region, price may once again resume its bullish stance and make an attempt to take out the 2.46 level. If we see a daily close below 2.26, which is the 38.2 Fibonacci retracement level of the 2013 low to high move, the corrective selloff may gather momentum and target 2.20.
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