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Startling Move in Brazilian Real Highlights Risk of Holding Emerging Market Currencies

Brazil’s financial markets are in shock following further revelations of bribery and corruption involving the country’s president, Michel Temer.

President Temer was yesterday forced to deny newspaper reports that he had discussed paying off a witness in an ongoing corruption investigation. And in a day of full scale political turmoil, two MPs began impeachment proceedings against Temer, and Aecio Neves, a political ally of the president and a man also accused of bribery, was suspended and had his home raided by police. Brazil’s Supreme Court has approved an investigation into the allegations.

BRL/USD 1 Week Chart

Yesterday’s developments are yet another act in Brazil’s ongoing political pantomime. The witness to whom the money was to be paid is the former Brazilian Congress House speaker, Eduardo Cunha, who himself was jailed for 15-years in March for money laundering, tax evasion and corruption. And the country’s previous president, Dilma Rousseff, was herself impeached in 2016. According to the BBC, almost a third of Temer’s cabinet is under investigation for alleged corruption.

“I will not resign. I repeat: I will not resign. I know what I did,” said President Temer in response to the accusations in a live TV broadcast yesterday.

Mr. Temer’s resolute attitude won’t save his political career, however; not according to Mara Telles of the Federal University of Minas Gerais. Telles said yesterday that “the Temer government is over, there is no possibility of its survival.”


Startling Moves in Financial Markets

Brazil’s benchmark equity index, the Bovespa, crashed yesterday, falling as much as 10.5% early in the day to lows around 60,300, triggering exchange circuit breakers which halted trading.

Likewise, the Brazilian currency, the real, fell 8% on the news and USD/BRL climbed to 3.4068 – an extraordinary one-day move in a currency and a move which, to be put into perspective, eradicates almost 80% of the real’s gains made against the US dollar since December of last year. Yesterday’s move in USD/BRL was also eight times larger than the pair’s average daily range for the 30-days prior to Wednesday.

The moves in Brazilian markets yesterday have been likened by traders to those experienced during the 2008/09 financial crisis.


Elevated Risk in Holding Emerging Market Currencies

Yesterday’s political and market drama in Brazil highlights the inherent danger of holding emerging market assets, including currencies.

Not only is financial market regulation and oversight weaker in emerging economies, but also the rule of law is regularly not upheld and there is, shall we say, a general increased willingness of those in power to partake in activities that are not exactly legit.

Furthermore, when investors’ minds are changed about emerging market assets, prices can change direction on a sixpence and can fall quickly.

When describing the South African rand in April (another emerging market currency), ABN Amro’s Arjen Van Dijkhuizen said that “it may rally strongly, but investors could change their minds abruptly and sell it off aggressively.”

Van Dijkhuizen’s comments came after the rand had flip-flopped from being 2017’s strongest performing currency to late-March, to one of the weakest following South Africa’s own political crisis.

Traders be warned about the risks of holding funds in emerging market currencies.

BestExchangeRates readers in need of Brazilian real or looking to change out of the currency ahead of further weakness, can find the cheapest online money changers using our comparison calculators for BRL travel money and BRL foreign currency transfersBusinesses negatively impacted by yesterday’s dramatic fall in the real can consider managing future foreign exchange exposure with an FX Forward or option.

Please note that the opinions of our authors are their own and do not reflect the opinion of Best Exchange Rates and should not be taken as a reference to buy or sell any financial product.

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