May 7, 2020 / 2:13 PM / 19 days ago

UPDATE 2-Brazil real sinks to new low on rate cut, 6.00 per dollar in sight

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By Jamie McGeever

BRASILIA, May 7 (Reuters) - Brazil’s real sank to a new all-time low against the dollar on Thursday after the central bank’s surprisingly large interest rate cut, bringing a test of the previously unthinkable 6.00 level within view.

The fall brings the real’s decline against the dollar this year to 31%, cementing its status as one of the worst-performing currencies against the greenback so far this year, and puts it on course for its biggest weekly decline in nearly five years.

The central bank slashed its benchmark Selic rate by 75 basis points to a record-low 3.00% on Wednesday and indicated it could repeat the dose next month, as it battles the deepening economic crisis fueled by the coronavirus pandemic.

Analysts expressed surprise that the central bank’s statement made no reference to the exchange rate, given the real’s steep decline this year. The forward guidance of another chunky rate cut, even though it might be the last in the cycle, intensified the selling pressure on Thursday, they added.

“The market reacted as you would expect: real falling, curve steepening. There were no (dollar) sellers today other than speculators and the central bank,” said Cleber Alessie Machado, broker at Commcor DTVM in Sao Paulo.

The central bank twice intervened, selling dollar swaps contracts, which relieved some of the pressure and prevented a test of 5.90 per dollar. But analysts say that is only a matter of time, then the big one.

“The real is likely to breach the 6.00 figure soon, and I wouldn’t bet against it going even higher,” said a senior trader in Sao Paulo.

The real traded as low as 5.8760 per dollar on Thursday, down more than 2% on the day and bringing its losses for the week so far to 6%. A decline of around 0.5% on Friday will seal its biggest weekly fall since September 2015.

Economy Ministry officials, including minister Paulo Guedes, have repeatedly said they are comfortable with a monetary policy mix of low interest rates and a weak exchange rate, the opposite of what Brazil had experienced for many years.

The central bank has intervened, selling dollars several times this year, but policymakers have made it clear they are not doing so to set a level for the currency.

Interest rate spreads widened on Thursday, reflecting the prospect of more policy easing but growing risks of capital outflows, market volatility and deteriorating investor sentiment stemming from the weak currency.

The January 2021-January 2029 interest rate futures spread widened nearly 50 basis points to 570 basis points .

Reporting by Jamie McGeever Editing by Bernadette Baum and Jonathan Oatis

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