Brazil real slumps to three-month low as central bank intervenes selling $2bn

BRASILIA: Brazil's real slid to a three-month low on Tuesday as investor concern over the government's fiscal health deepened, despite the central bank's twice intervening in the spot foreign exchange market selling more than $2 billion.

A $1 billion sale was followed up with a sale of $1.095 bln after the real had slumped to a new three-month low of 5.73 per dollar, taking central bank intervention since Thursday last week to over $5 billion.

The real recovered some ground but still ended the session at 5.6662 per dollar, its weakest close since Nov. 3 last year.

Brazilian assets were under heavy pressure on Tuesday after President Jair Bolsonaro eliminated certain fuel taxes and increased a tax on banks, intensifying concern about the fiscal trajectory and the central bank's predicament with interest rates at record lows but inflation rising.

"The central bank is trying to tame volatility and deal with liquidity issues, but there is nothing it can do about the (real's) overall trend," said Drausio Giacomelli, head of emerging market strategy at Deutsche Bank in New York.

"The problem is purely fiscal, and the central bank cannot solve the fiscal problem," he said.

The real is down 8.2% against the dollar this year. Aside from the Libyan dinar and Sudanese pound, which both suffered massive one-off devaluations, it is the world's worst performing currency against the dollar this year, according to Refinitiv data.

The government is expected to extend emergency aid to millions of poor people as the second wave of the COVID-19 pandemic sweeps the country. But it is unclear whether it will be accompanied by corresponding spending cuts over the longer term.

The central bank's action on Tuesday followed two similar interventions each on Thursday and Friday, the first time this year it had sold dollars in the spot FX market.

Last year it sold almost $25 billion in the spot market as the real depreciated some 30% against the dollar.