The Brazilian real (BRL) is the official currency of Brazil. Adopted in 1994 to replace the Brazilian cruzeiro, the real has gone through periods of volatility but overall has provided relative economic stability for Brazil.

Introduction to the Brazilian Real

The real was introduced on July 1, 1994 by President Itamar Franco as part of the Plano Real economic reform package. The currency was originally intended to circulate alongside the cruzeiro for a transition period, but the public quickly adopted the real as the preferred currency.

The real is subdivided into 100 centavos. The ISO code for the currency is BRL and the currency symbol is R$.

Adoption of the Real

Several factors led to the successful adoption of the real as Brazil’s new currency in 1994:

  • Brazil was suffering from hyperinflation under the cruzeiro, with prices spiraling out of control. The real was seen as a stable alternative.
  • The real was introduced following years of economic planning and policy reform under the Plano Real. This careful strategy inspired public confidence.
  • Initially, the real was pegged to the US dollar, providing stability. The peg was removed in 1999 as economic conditions improved.
  • High denomination banknotes (100 and 50 reals) helped psychological acceptance. The cruzeiro notes required millions for basic transactions.
  • The government ran an effective media campaign promoting the real as the “currency of confidence.”

By September 1994, the real had largely displaced the cruzeiro in everyday transactions. It facilitated trade and helped control hyperinflation.

History and Development of the Real

The real can be divided into three key periods since inception:

1. Introduction and Growth (1994 – 1998)

  • July 1994 – Real introduced pegged to US dollar at near 1:1 rate
  • Inflation dropped from over 1000%/year tosingle digits by 1998
  • Economy grew rapidly with new currency stability
  • Major state firms privatized under President Cardoso

2. Devaluation and Crisis (1998 – 2002)

  • January 1999 – Peg removed, real devalued sharply
  • Currency declines from 1.2 R$/USD to nearly 4 R$/USD by 2002
  • Series of external shocks including Asian financial crisis
  • Loss of investor confidence in emerging markets
  • Rise of Brazilian public debt

3. Stabilization under Lula (2003 – Present)

  • Administration of President Lula da Silva brought discipline to public finances
  • Real stabilizes in range of 1.8 – 3.5 R$/USD
  • Inflation targeting introduced, central bank independence strengthened
  • Real provided foundation for strong economic growth in 2000s
  • Remains relatively stable currently around 5 Reais to the US dollar

Coins and Banknotes

Circulating real banknotes include 2, 5, 10, 20, 50, and 100 reals. The current series was first issued in 2010 under the Plano Real’s original designer. Modified versions with additional security features were released in 2015-2020.

The banknotes depict notable Brazilian cultural figures and features of fauna. They employ advanced anti-counterfeiting measures like watermarks, security threads, ultraviolet features, and raised printing.

The coins of the real include 1, 5, 10, 25, and 50 centavos, and 1 real. The 1 real coin has an inner section made of a different material than the outer ring, for easy authentication by touch.

Exchange Rate Policy and Management

Brazil’s central bank, the Banco Central do Brasil, is responsible for monetary policy and managing the exchange rate. Policy is set by the bank’s Monetary Policy Committee (COPOM).

Exchange rate management approach has evolved over the real’s history:

  • 1994 to 1999 – Pegged to US dollar
  • 1999 to present – Free floating exchange rate
  • 2002 to 2011 – Dirty float with periodic central bank intervention
  • 2011 to present – Clean float with market forces setting exchange rate

The central bank maintains reserves of dollars and other foreign currencies to deploy in case of excessive volatility. Intervention is now rare as the bank relies on interest rate changes for monetary policy.

Benefits and Challenges of the Real

Adoption of the real has provided Brazil with many economic benefits:

Pros

  • Currency stability following a period of damaging hyperinflation
  • Eliminated need to carry milllions in hyper-devalued cruzeiros
  • Provided foundation for strong economic growth in the 2000s
  • Supported foreign investment and trade
  • Integrated Brazil further into global markets

Cons

  • Loss of exports competitiveness during periods of overvaluation
  • High interest rates required at times to attract foreign capital flows
  • Debt burden increased substantially in 1990s
  • Volatility has at times complicated monetary policy
  • Counterfeiting and corruption scandals have emerged

Overall, most economists concur the benefits have outweighed the costs of adopting the real. It is recognized globally as the Brazilian currency and remains a symbol of trade and financial development for the country.

Role in Forex Markets

As one of the world’s most actively traded emerging market currencies, the Brazilian real has long been a favorite of forex traders. Its high volatility and liquidity make it well-suited for forex trading strategies.

Trading the Real on Forex

Here are some tips for traders accessing BRL currency pairs:

  • USD/BRL is most actively traded pair
  • Watch for volatility around Brazilian elections, commodity trends
  • Central bank policy decisions cause fluctuations
  • Technical analysis like moving averages work well
  • Fundamental factors like GDP, inflation must be monitored
  • Carry trades were popular when Brazilian interest rates were high

Forecasting the Real’s Price

Forecasting BRL exchange rate moves requires following key indicators:

  • Brazil GDP growth and business cycles
  • Commodity export prices like oil, coffee, soybeans
  • Interest rate moves by the central bank
  • Fiscal policy and government debt ratios
  • Foreign capital flows and trade balances
  • Relative US dollar strength or weakness
  • Risk appetite for emerging market assets

Using a mix of technical and fundamental analysis while following Brazil’s economic trends can help traders forecast real forex price action.

The Real in the Economy and Daily Life

As Brazil’s national currency, the real is integral to the economy and daily commerce. Here are some ways the currency impacts Brazilian society and business:

  • Salaries denominated in reals for consistency
  • Home and car loans issued in reals to avoid exchange rate risk
  • Retail stores price goods in reals, receive payment in reals
  • Utility bills, rent, transportation fares all in reals
  • Taxes collected by municipal, state and federal governments in reals
  • Stock market denominated in reals, as are other financial assets
  • ATMs dispense real banknotes to public 24/7 across Brazil
  • Online banking, credit cards and wire transfers use real pricing

The real provides a common value measure and medium of exchange across the Brazilian economy. Over 25 years, it has become woven into the fabric of everyday commerce and banking.

Future Outlook for the Real

Looking ahead, Brazil’s economy should continue growing at a moderate pace of 2-3% annually. This GDP trajectory suggests relative stability for the real:

  • Inflation will likely remain contained within central bank’s tolerance band
  • Government finances have improved, reducing currency risk premium
  • Central bank will stick to inflation targeting, allow exchange rate to fluctuate
  • Periodic volatility is expected depending on commodity trends
  • Upside for real will be limited by Brazil’s structural competitiveness challenges

Barring a major economic downturn, the real should avoid any severe depreciation while fluctuating in a range from 4 to 5.5 per dollar over the next few years. Brazil’s economic maturity means the currency has entered a newly stable phase.

Conclusion

Since its launch in 1994, the Brazilian real has succeeded in providing a stable, trusted currency that helped drive economic growth following a period of severe instability. It has facilitated foreign trade and investment while integrating Brazil further into the global economy.

For forex traders, the real offers opportunity thanks to its liquidity and volatility around economic trends. While periodic pressures are inevitable, the real looks positioned to maintain its role as a mature, globally recognized currency reflecting Brazil’s economic progress over the past three decades.