Wednesday, January 18, 2012

Today's Major Market Move: Brazilian Real Strengthens 5.5% Against the Dollar this Month

Despite the fact that there have been expectations of an interest rate cut for some time now, the Brazilian Real has strengthened 5.5% against the US Dollar this month. The Real has been the best performing currency relative to the Dollar in 2012.

Click here to go to the live table.
Earlier today the expectations were confirmed and the announcement was made that the Brazilian central bank was cutting the benchmark interest rate by half a point. The consensus interpretation of the wording of the announcement is that there will be additional easing. Here's some commentary from the Wall Street Journal:
The brief post-meeting statement was identical to the language in the previous decision in December. The central bank reiterated its view that "moderate adjustments" to interest rates would contribute to bringing down inflation; the market has in the past interpreted that phrase as suggesting the likelihood of another 0.50 percentage point cut at the next meeting in March.

With that phrasing unchanged, "the reading from the market will be that the next cut will be 50 basis points, too," said Alfredo Barbutti, an economist at Liquidez Brokerage in Sao Paulo. "If they wanted to send a different signal, they would have taken advantage of this to start doing it."
Right now for most countries, equities react positively to a weakening currency. But because Brazil has been dealing with a nagging inflation problem, over the last six months the correlation has been opposite with equities rising when the currency strengthens. Here's a chart of the benchmark Brazilian equity index, the Bovespa, compared to the US Dollar / Brazilian Real cross.

Click here to go to the live chart.

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