Emerging Markets: Brazilian Real Falls on Risk Aversion; Argentine Peso Sink on Rates

by on May 21, 2014 4:27 am BST

Emerging market currencies are falling with growing geopolitical risk that stems from Ukraine to Thailand, which is causing market participants to develop a more defensive strategy in the risk currencies.

The Brazilian real fell as swap rates on contracts maturing in January 2017 increased one bps to 12.01 percent. According to Joao Paulo de Gracia Correa, a forex trader at Correparti Corretora de Cambio, said “investors are adopting a more defensive position due to the rise in geopolitical tension.” Correa correlates the real’s drop on risk aversion, but the real is still up 6.6 percent this year.

In order to support the real, the central bank sold $198.4 million in foreign exchange swaps, while rolling over $247.1 million in contacts. Although Brazil’s fiscal policy is moving toward a more neutral stance, the central bank has had to raise the benchmark rate nine consecutive times to 11 percent. The country has seen a spike in inflation to 6.43 percent, just below the central bank’s target of 6.5 percent.

The Argentine peso is selling off at the fastest rate since February. Rising interest rates are deemed futile in battling increasing inflation that is estimated to be over 30 percent.

The peso has declined 10 percent over the last week through the swap market. The large Argentine black market, used to avoid capital controls, seen a 3.5 percent decline in the peso against the US dollar. “If they cut interest rates and they don’t do a fiscal adjustment, inflation expectations rise and the peso starts getting overvalued,” said Ezequiel Aguirre, a strategist at Bank of America.