Brazil's real brushes record low, tests central bank's intervention resolve

BRASILIA, Jan 31 (Reuters) - Brazil’s real skirted a record low against the dollar on Friday, on course for one of its biggest monthly falls since the 2015-16 recession as traders tested the central bank’s resolve not to intervene in the face of a steadily depreciating exchange rate.

Against an increasingly gloomy backdrop for emerging market assets as the coronavirus crisis deepens, the dollar rose to a high of 4.2769 reais on Friday, almost touching its all-time high of 4.2770 reais struck on Nov. 26 last year.

That brought the real’s losses in January to nearly 6%, which would be its third-steepest monthly fall in over four years.

The central bank intervened selling dollars on the spot market in August last year for the first time in over a decade as the real as the real slid, and waded in again in November.

Even though the real is flirting with a new all time low, analysts at Morgan Stanley reckon the central bank will keep its powder dry for now.

They cite three reasons: low volatility relative to other markets; low and declining inflation expectations, indicating a negligible “pass through” from the weak exchange rate; and relatively balanced investor positioning.

“The probability of the central bank stepping in remains low. Signaling from authorities suggest they are comfortable with (the real’s) current levels,” they wrote in a note to clients on Friday.

Three-month implied dollar/real volatility, for example, last week hit a five-year low of 9%, and on Friday it had risen to 10%. But in August last year, when the central bank intervened, it was above 14%.

Meanwhile, a closely watched survey of economists this week showed 2020 inflation expectations falling to a new low of 3.47%, further below the central bank’s official goal of 4.00%.

The central bank’s rate-setting committee known as Copom meets next week. The more benign inflation outlook has fueled expectations Copom will cut the benchmark Selic rate a quarter point to a new low of 4.25%.

Reporting by Jamie McGeever Editing by Alistair Bell