The Brazilian real is already the worst performing currency in the world this year, but analysts and investors warn it still has further to fall.

Most emerging-market currencies have taken heavy hits as a result of the coronavirus outbreak with several, including the Turkish lira, hitting record lows. But the real still stands out, with a 32 per cent drop against the dollar since January.

At the start of the year investors could get BRL4 per dollar, but by mid-May, the buck was worth BRL5.96, according to Refinitiv, marking the weakest ever point for the Brazilian currency. Now some of the most influential currency-trading banks think it could slide to BRL6 and beyond.

“The pace of declines we’ve seen is unlikely to continue but we expect the real to weaken a bit further,” said Xueming Song, a portfolio manager at DWS Group.

Mr Song added that president Jair Bolsonaro’s handling of the Covid-19 crisis “has not boosted confidence and the country has high political risks while interest rates are now very low.”

Goldman Sachs now expects the dollar to trade at BRL6 in three months’ time, from its previous prediction of BRL5.25. HSBC analysts have pushed their forecast to BRL6.2 by the end of the year from BRL4.9 previously. JPMorgan predicts a breach of BRL6 in June.

At the end of last year, investors picked the real as one of their favourite bets for 2020. Consensus forecasts were of 2 per cent economic growth, and the government had set in motion a series of ambitious reforms under the guidance of Paulo Guedes, the economy minister who had won good reviews from international fund managers.

But six months later, Mr Guedes appears to be sidelined and the president is at risk of being impeached. Brazil has the third-highest number of coronavirus infections in the world.

“Brazil’s story just received a huge kick in the teeth,” said Luis Costa, a strategist at Citi in London.

The IMF expects the economy to shrink by 5.3 per cent this year. In the first four months of the year, Brazilian equity and fixed income markets have seen $44bn of outflows from international and local investors, according to estimates from Ashmore.

Brazil records largest ever outflows over a 3-month period

In the past, investors were compensated for Brazil’s turbulent politics by the significantly higher interest rates on offer compared with developed markets. At the start of 2019 the key benchmark interest rate was 6 per cent. But after three rate cuts this year, the rate now stands at 3 per cent with another 75 basis points of cuts expected. The country’s central bank is also exploring joining other emerging markets in buying government bonds, similar to the quantitative easing programmes under way in developed markets.

Wim-Hein Pals, lead portfolio manager for emerging markets at Rotterdam-based investment manager Robeco, said the lower interest rates have weakened a key source of support for the real.

“QE in Brazil makes me a bit nervous because the country doesn’t have the best track record in managing inflation,” Mr Pals said.

Mr Pals said the currency is starting to look like “a steal” at current levels. But he added that, given the risks of further falls, it is still too early to buy.

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