Anything can happen in a free market. But what will become of the weakest currency in the big four emerging markets if the Fed hikes rates next month? Will it to go R$5.00 as some uber-bears are now forecasting?
Brazil’s benchmark consumer price index, the IPCA, rose to 9.9% from a year earlier in October, up from a steady 9.5% in August and September. This is happening in a recession and with interest rates unchanged at 14.25%. Moreover, the currency has actually strengthened by around half a percent over the last month. In monthly terms, Brazil’s inflation index rose a non-seasonally adjusted 0.82% in October, over 10% now in annualized terms, all because of higher domestic food prices and transportation costs. Pass-through of the weaker real was the key driver of inflation, raising the local price of fuel and food, an energy-intensive product. The real is down 26.7% against the dollar over the last six months and has only began to flex its muscles in the last few weeks.
The real’s stabilization since mid-September could help to cool inflation in 2016 if sustained, says Bill Adams, senior international economist with PNC Financial in Pittsburgh.