January 30, 2020 / 7:47 PM / 20 days ago

Brazil's real slides toward record low, puts pressure on central bank

BRASILIA, Jan 30 (Reuters) - Brazil’s real hit a two-month low against the dollar on Thursday, slumping to within sight of its record low under a wave of global risk aversion on fears over the coronavirus outbreak and its diminishing yield appeal.

The dollar rose more than 1% on the day to a high of 4.2720 reais, within half a centavo of its all-time high of 4.2770 reais struck on Nov. 26 last year.

The real has now fallen 6% against the dollar this month. While it has got caught up in the broader emerging market selloff this week as the coronavirus has spread, and investors have sought safer assets, domestic factors are also at play.

The central bank’s rate-setting committee known as Copom meets next week. Recent economic data and a more benign inflation outlook have fueled expectations Copom will cut the benchmark Selic rate a quarter point to a new low of 4.25%.

“The growing expectation of an interest rate cut, the widening of the current account deficit, and concerns about the impact of the coronavirus have caused the real to weaken,” Capital Economics analysts wrote in a note on Thursday.

Figures this week showed Brazil’s 2019 current account deficit was the widest in four years, and a closely watched survey of economists showed 2020 inflation expectations falling to a new low.

Traders say this mix of variable economic data, low inflation, falling interest rates and yields, and a weak currency piles pressure on the central bank to act - either to sell dollars and stem the real’s slide, or not to cut rates.

“With such low rates we’re also having some capital outflows,” said a senior bank trader in Sao Paulo. “This is a risky balance that requires prudence in managing the monetary policy.”

Reporting by Jamie McGeever in Brasilia Editing by Matthew Lewis

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