(Bloomberg) -- Brazil markets fell on Friday, capping a turbulent week for Latin America’s largest economy that saw its currency post some of the sharpest gains — and some of the sharpest losses — among global peers in the aftermath of an outsize interest rate hike and President Luiz Inacio Lula da Silva’s sudden health crisis.
The real was either the top or worst performer among emerging-market currencies almost every single session this week. On Thursday, it rose as much as 1.6% after policymakers delivered a 100 basis point interest rate hike and pledged two more of the same size by March. Hours later, it had already given back all its gains and was down 1.4% as a member of the cabinet said Lula would run for office again in 2026.
As the selloff continued on Friday, the central bank stepped in with its first spot auction since August, selling $845 million. The impact was short-lived, with the currency closing 1% weaker against the dollar, lagging EM peers. Long-end swap rates climbed over 40 points.
The intervention provides liquidity amid sudden price swings, “but it does not change the direction in which the currency should go, as it does not change the fundamentals,” said Milena Landgraf, a partner at Jubarte Capital in São Paulo.
After close, the central bank announced another auction — this time, a credit-line sale of up to $3 billion to be held on Monday. Through FX credit-line auctions, the central bank sells the so-called dollar spot and pledges to buy it back in the near future in exchange for a certain interest rate. Those moves try to supply liquidity to the spot market.
Health Worries
Brazil’s 79-year-old left-wing president stirred concern this week after undergoing brain surgery for a bleeding, a result from a fall back in October. The health woes, which emulate those around Joe Biden in the US, further clouded the outlook for the country as investors bring forward a debate on a potential change of government — either in the upcoming elections or in case Lula has to step back from his duties to fully recover.
“Markets are unhinged,” said Alberto Ramos, chief economist for Latin America at Goldman Sachs. “Many investors are throwing the towel to the ring.”
The Brazilian president was moved out of the ICU and into semi-intensive care, the hospital said Friday, adding he is “lucid” and recovering well.
Selloff
Lula has clashed with markets for most of his third term, pushing for higher spending to help the poor and dismissing the need for fiscal restraint. The country’s budget deficit has ballooned to the equivalent of about 10% of Brazil’s gross domestic product in nominal terms.
The selloff deepened last month, when the government added tax-relief measures in a spending cut package, watering-down savings the plan would generate. Investors, who had hoped it would serve as a boost to the battered currency, rushed to dump assets, sending the real to a record low.
Investors have been fretting at the possibility of another Lula term. He’s seen as a strong contender for the 2026 vote, according to a Quaest poll commissioned by the 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 there’s continuity in the current economic policy, the more assets prices will worsen.”
Concerns about the outlook for the government’s budget if Lula stays in power dulled the impact of what traders saw as a “shock and awe” move by the central bank. Policymakers jacked up interest rates by a full percentage point to 12.25% and vowed to bring borrowing costs to 14.25% in coming months. Two days later, it announced the spot auction.
What Bloomberg strategists are saying ...
“In central banking circles, it’s up for debate whether it’s more cost-effective to announce a series of regular interventions, or to keep traders on their toes by dipping into the market now and then. Brazil prefers the latter approach. We can expect more intervention after Friday.”
Sebastian Boyd, MLIV strategist, Santiago
The all-in approach on rates, which surprised even the most hawkish of the predictions, was an attempt to restore investor confidence and stabilize local assets — which have lagged most of their peers this year on the back of mounting concerns about the trajectory of Brazil’s finances.
The hike sank Brazil stocks, which until Wednesday were on their best run since August. They crashed 2.7% the next session in the worst day in almost two years. Bouts of stop-loss activity upended the local curve of interest-rate futures on Thursday, with some longer-end contracts surging about 70 basis points.
“Hectic is an understatement” for the week, said Alejandro Cuadrado, head of global FX and Latin America strategy at Banco Bilbao Vizcaya Argentaria SA in New York. “Brazil remains mainly untradeable.”
--With assistance from Walter Brandimarte.
(Updates with new central bank auction in fifth paragraph)