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Brazilian Real in last six months fell 38% against the dollar. This year alone, depreciation is around 27%, showing the gain in momentum. Pain might not be over for real yet.
Why the situation dire?
- For the first time in years Brazilian economy is expected to contract.
- Yield curve is inverted showing further pain in near term.
- Rise in public sector wages do not support the growth in GDP. Public sector wage grew more than 50% since 2004 compared to a GDP growth of 12.5%.
- Since September 2014, Brazil's sovereign credit default swap (CDS) premium rose from just 2.1% to 3.75% as of now.
- To add to the woe, political and social situation tensed up after thousands took to streets last Sunday to protest against current government and corruption at Petrobras, state run oil company.
- Government might not be successful to implement the austerity.
- Since September last year, price of orange juice and sugar have fallen close to 30% hurting the export. Current account deficit is reaching records in recent time.
Brazilian real is trading at 3.27 against dollar and next target could be somewhere around 4 against dollar.
