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"Do, whatever it takes", and "use all possible instruments" are the most popular central banks' verbal intervention phrases, which are sure shot success, definitely in the short term, even if not in the medium or long run.
Brazilian central bank sought to the latter remark, leading to biggest single day rally in Real in at least seven years. Real after tumbling to record low 4.2478 against Dollar, snapped back sharply to gain as much as 7% for the day. After Closing at 3.98 against Dollar, Real dropped further again today to trade around 3.93 against Dollar.
Is the downtrend over for Real?
- It will be too early to issue such calls, given the fact that weakness of Real has been stemming from weakness in the economy, scandal at Petrobras and massive short term debt overhang of Brazilian corporates. That fundamental hasn't changed materially. However, weaker Real is likely t provide some support to the economy.
- In the short term Real is likely to gain or consolidate over fear of central bank intervention. However if the bank fails to act upon its promises after the announcement, it could severely dent credibility and lead to further slide in Real. Markets will also be looking at costs of any intervention in terms of FX reserve. As of August report, Brazil has FX reserve in tune of $368.15 billion, enough to kill lot of speculators, but not enough to change longer term fundamentals.
