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Brazil's real jumps after central bank pledges to flood market with currency swaps
IT MAY not have been pretty, nor quick, but Brazil's central bank finally became the latest emerging market monetary authority to halt its currency's depreciation by shoring up markets.
The real rose for the first time in four days last Friday, jumping more than 5 per cent and leading world gains, after the central bank pledged to flood the market with currency swaps. Investors earlier last week ignored central bank attempts to bolster the currency, sending the real to a two-year low.
Unlike India and Turkey, both of which hiked interest rates, Brazil's central bank has said it won't let the currency determine monetary policy decisions. The Indian central bank raised its benchmark rate on Wednesday for the first time since 2014 and was followed by Turkey, which surprised analysts by tightening policy for the third time in less than two months.
Indonesia, which had lifted rates the previous week, said more tightening may come if needed.
While the central banks' efforts did temporarily manage to stem downward spirals in emerging market currencies, long-term stability will come only with economic policies that promote growth and balance budgets, said Per Hammarlund, the Stockholm-based chief emerging market strategist at SEB SE. "EM central bank monetary (policy) would have to be accompanied by prudent fiscal and investment-friendly economic policies," he said.
Indeed, currencies in India and Indonesia initially rallied after the rate hikes, only to resume losses as investors concluded that interventions would smooth short-term volatility, not alter a currency's path.
The Turkish rally rose after the rate hike, then reversed course and finally flipped again, ending the week higher. BLOOMBERG