The Brazilian real is set for its longest losing streak in more than two years as concerns about China’s economy and US interest rates sour the mood with riskier assets, putting emerging market currencies on the brink of erasing yearly gains.
(Bloomberg) — The Brazilian real is set for its longest losing streak in more than two years as concerns about China’s economy and US interest rates sour the mood with riskier assets, putting emerging market currencies on the brink of erasing yearly gains.
Outflows in the real were so heavy over the past few days that they pushed the so-called casado — the difference in points between its spot and the shortest future contract negotiated at the local exchange — into negative territory. That puts the market in what investors call “backwardation,” with spot prices higher than futures even though Brazil has higher rates than the US. It’s a rare occurrence that only happens in times of exacerbated physical dollar demand.
The slide is not confined to Brazil. The expectation the Federal Reserve will keep rates higher for longer and doubts about China’s economic outlook have boosted global volatility, leading traders to unwind bullish positions in emerging markets. An MSCI gauge of developing nation stocks erased 2023 gains last week, and a similar index for currencies has trimmed its yearly advance to just 0.2%.
The Brazilian real’s slump over the past seven sessions — 3.3% — is not even the biggest among developing nations. The Hungarian forint and the Colombian peso have slipped at least 3.7% each, while the Mexican peso is close behind, down about 2.9%.
“The fact that China’s economy has not been performing as expected and that we still see short-term jitters in the US economy — like the shutdown — has led global investors to take a more defensive stance on Latam currencies as a whole lately,” said Rabobank strategist Mauricio Une.
The real fell 0.6% on Thursday, breaching 5.00 per dollar, which had been attracting buyers over the last months. That opens the way for a quick test of its 200-day moving average, before an even more significant dollar support area near 5.08 per dollar.
–With assistance from Leda Alvim.
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