Brazilian markets fell this Friday (13), ending a turbulent week for Latin America’s largest economy, which saw its currency record some of the steepest gains – and some of the steepest losses – among its global peers, after a disproportionate increase in interest rates and the sudden health crisis of President Luiz Inácio Lula da Silva.
The real had either the best or the worst performance among emerging market currencies in almost every session this week. On Thursday (12), it rose 1.6%, after public policy makers granted an increase of 100 basis points in the interest rate and promised two more of the same size by March. Hours later, it had given back all its gains and was down 1.4%, when a cabinet member said Lula would run again for office in 2026.
As the sale continued on Friday (13), the central bank stepped in with its first spot auction since August, selling $845 million. The real pared losses after the announcement, but was still down 0.7% at 3:45 pm local time.
The intervention provides liquidity amid sudden price fluctuations, “but it does not change the direction the currency should follow, as it does not change the fundamentals,” said Milena Landgraf, partner at Jubarte Capital in São Paulo.
Brazil’s 79-year-old president raised concerns this week after undergoing brain surgery to treat bleeding resulting from a fall in October. The health problems, which resemble those of Joe Biden in the USA, further clouded the prospects for the country, as investors anticipated the debate on a possible change of government – whether in the next elections or in the event that Lula had to resign. take time off from their duties to fully recover.
“The markets are out of balance,” said Alberto Ramos, chief economist for Latin America at Goldman Sachs. “Many investors are throwing in the towel.”
The Brazilian president was transferred from the ICU to semi-intensive care, the hospital said on Friday, adding that he is “lucid” and recovering well.
Race to sell
Lula fought with markets for most of his third term, pushing for greater spending to help the poor and dismissing the need for fiscal restraint. The country’s budget deficit has increased to the equivalent of about 10% of Brazil’s gross domestic product in nominal terms.
The sell-off deepened last month when the government added tax-cutting measures to a spending-cutting package, diluting the savings the plan would generate. Investors, who hoped this would serve as a boost to the devalued currency, rushed to dump assets, causing the real to hit a record low.
Investors have been concerned about the possibility of another Lula term. He is seen as a strong competitor for the 2026 election, according to a Quaest survey commissioned by brokerage Genial Investimentos, released this week.
“The outlook for the next presidential term will really put a lot of pressure on assets,” said André Muller, chief strategist at AZ Quest. “The greater the chance of continuation of the current economic policy, the more asset prices will worsen.”
Concerns about the outlook for the government’s budget if Lula remains in power blunted the impact of what investors saw as a “shock and awe” move by the central bank. Policymakers raised interest rates by one percentage point to 12.25% and promised to raise borrowing costs to 14.25% in the coming months. Two days later, the bank announced the cash auction.
“In central banking circles, there is debate as to whether it is more economical to announce a series of regular interventions or to keep investors on their toes by entering the market every now and then. Brazil prefers the latter approach. We can expect more interventions after Friday.”
Sebastian Boyd, MLIV Strategist, Santiago
The all-in approach to rates, which surprised even the most hawkish of forecasters, was an attempt to restore investor confidence and stabilize local assets – which have lagged most of their peers this year due to growing concerns on the trajectory of Brazil’s finances.
The increase sank Brazilian shares, which until Wednesday were at their best since August. They fell 2.7% in the following session, the worst day in almost two years. Bursts of stop-loss activity shifted the local interest rate futures curve on Thursday, with some longer contracts rising about 70 basis points.
“Busy is an understatement” for the week, said Alejandro Cuadrado, head of global currency and Latin America strategy at Banco Bilbao Vizcaya Argentaria in New York. “Brazil remains, for the most part, unmarketable.”
