Brazilian Real Underperforms as Fitch Cuts Credit Rating

The Brazilian real was underperforming compared to other Latin American currencies on Thursday as Fitch ratings reduced Brazil’s sovereign credit grade. The currency still managed to erase its losses but was unable to demonstrate the same strength as its peers.
Fitch cut Brazil’s credit rating from BBB to BBB- with negative outlook, a move that was largely expected by analysts. The agency explained its decision in the following manner:

The rating downgrade reflects Brazil’s rising government debt burden, increased challenges to fiscal consolidation and a worsening economic growth backdrop. The difficult political environment is hampering progress on the government’s legislative agenda and creating a negative feedback loop for the broader economy. The Negative Outlook reflects Fitch’s view that economic and fiscal underperformance is likely to persist while political uncertainty could continue weighing on broader confidence, delay a turnaround in investment and growth, and increase risks for the medium term fiscal consolidation needed for debt stabilization.

The real dropped as much as 1 percent before rebounding. Risk appetite, caused by speculations about a delayed interest rate lift-off from the Federal Reserve, still supports high-beta currencies, and this explains the real’s bounce.
USD/BRL traded at 3.7957 as of 21:54 GMT today. EUR/BRL ticked down from 4.3210 to 4.3203.

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