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By Jamie McGeever
BRASILIA, Jan 31 (Reuters) - Brazil’s real slumped to a record low against the dollar on Friday, chalking up its third-largest monthly falls since the 2015-16 recession as traders tested the central bank’s resolve not to intervene in the face of the depreciating exchange rate.
Against an increasingly gloomy backdrop for emerging market assets as the coronavirus crisis deepens, the dollar traded as high as 4.2862 reais on Friday, surging past its previous all-time high of 4.2770 reais struck on Nov. 26 last year.
That marked the real’s fifth weekly decline against the dollar in a row and brought its losses in January to more than 6%, the third-steepest monthly fall in over four years.
Some analysts reckon the selling is overdone and anticipate a rebound in the coming weeks.
“The real continues to underperform due to rate cut expectations, but we’re not yet giving up on the growth story in Brazil,” strategists at Citi wrote in a research note.
“Seasonality is positive in February, and the IPO (initial public offerings) pipeline is also supportive,” they said, recommending an overweight position in the real.
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 slid, and waded in again in November.
But there was no sign of action on Friday, even with the real spiraling to new lows, traders said. Morgan Stanley analysts 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 above 10%. But in August last year, when the central bank intervened, it was above 14%.
The central bank’s rate-setting committee, known as Copom, meets next week. A 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 and Dan Grebler