USD/BRL: Here’s why the Brazilian real has imploded

The Brazilian real has collapsed to a record low as concerns about the economy remained. The USD/BRL exchange rate surged to a high of 6.014, its highest level on record. It has jumped by 25% this year, making it one of the worst-performing currencies.

Why is the Brazilian real collapsing?

The USD/BRL exchange rate has surged because of the strong US dollar and the concerns about the Brazilian economy.

Recent economic data showed that the Brazilian economy has stagnated. According to the statistics agency, the economy expanded by 3.3% in the third quarter, an improvement from the previous quarter’s 2.7%. On the positive side, the IMF has recently upgraded the GDP growth estimate from 2.1% to 3%.

A key issue is that Brazil has faced a prolonged drought this year that affected the agricultural sector. In line with this, agricultural commodities that power the economy like corn and soybeans have fallen sharply in the past few years.

The market expects more volatility in the agricultural commodity industry now that Donald Trump has won the election. He has already threatened that he will increase tariffs on goods from key countries like Canada, Mexico, and China. 

If he does that, these countries will respond as they did before by boosting tariffs on US agricultural products. That’s because the US is a big exporter of agriculture and the fact that most farming states are led by Republicans.

These tariffs could, therefore, be positive for Brazil since more countries like China will turn to its crops. Also, they could also push their prices higher.

The USD/BRL has surged even as the Brazilian central bank has continued to hike interest rates in the past few months. The bank decided to hike interest rates by 0.50% in the last meeting in a bid to tame the elevated inflation.

It pushed the base lending rate to 11.25% in its November meeting, the second interest rate hike since September. The bank noted that it was experiencing substantial inflation risks, helped by the resilient economic activity and rising consumer price forecasts. 

Economists expect that the central bank will hike interest rates again in December, possibly by 0.75% since inflation is strong. Data released this week showed that the mid-month CPI rose by 0.62% on a MoM and by 4.77% on an annual basis. The two numbers were higher than the median estimate of 0.48% and 4.62%.

Meanwhile, the US dollar index has also jumped sharply in the past few months because of the risk-off sentiment in the market. This rally accelerated recently after Donald Trump won the election. Trump has pointed to new tariffs and mass deportations, moves that are seen as inflationary.

USD/BRL technical analysis

The daily chart shows that the USD to BRL exchange rate has been in a strong bull run in the past few months. It rallied above the key resistance at 5.86, its highest swing in August and November this year. By moving above that level, the pair invalidated the double-top pattern that was forming.

The USD/BRL pair has moved above the 50-day and 100-day Exponential Moving Averages (EMA). Also, the Relative Strength Index (RSI) and other oscillators have continued to point upwards, a sign that it has momentum.

The USD to Brazilian real has moved above the top of trading range of the Murrey Math Lines. Therefore, the pair will likely continue rising as bulls target the extreme overshoot at 6.4453, which is about 7.2% above the current level. A drop below the support at 5.86 will invalidate the bullish view.