Brazilian Real Retreats Toward August Lows

The Brazilian real has weakened to nearly 5.5 per US dollar, approaching its early August low of 5.52 as observed on October 10th. This shift comes in the wake of a new wave of trade risk reassessment, which has heightened immediate demand for the dollar. Factors contributing to this include reciprocal port fees and Chinese sanctions against US-linked divisions of South Korea's Hanwha, both of which have increased shipping tensions and the likelihood of prolonged trade disruptions. In response, importers, exporters, and shipping companies are bolstering their dollar hedges and cash reserves. Although China's record iron ore purchases in September might seem positive, they do not fully mitigate the risk of delays or reroutes in seaborne trade, which subsequently impacts anticipated dollar revenues for exporters. On a domestic front, the issue is exacerbated by fiscal uncertainty after Congress halted a tax reform that was anticipated to enhance public finances. This has led to expectations of increased debt issuance and diminished foreign interest in assets denominated in the local currency.

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