For a good part of the last 5 years it has been China, which has been affecting the Latam currencies. Brazil more than any other. A large exporter of almost every commodity has seen a surge in prices, growth and foreign investment of such great scale, that the host of the next World Cup, and Olympics was smiling like a carnival dancer.
That is until one afternoon Bernanke spoke and everything in Latam ( and EM in general ) changed. The most important factor in the EM boom went largely overlooked – the worldwide supply of easy money. It is not longer a China story it’s now a Dollar story. And ever since the BRL has been one way in the opposite direction.
Currency War enters new phase
Off almost 15% in the last 3 months. There’s a global correction as the Currency War enters its new phase. But, it is worth noting that the ‘war’ itself was all about EM currencies being too strong in the first place.
To aid the embattled national currency, Brazil’s central bank said it will infuse $60 billion worth of cash and insurance to the foreign-exchange market by the end of 2013. With an auction of $1 billion of dollar loans every Friday and an offering of the equivalent of $500 million worth of foreign-exchange swaps Monday through Thursday.
“Brazil for me is making a policy error in trying single handedly to fund the Current Account Deficit through intervention. Better to listen to markets and reform than to sit alone on the offer in futures....” says a London based Head of EMFX trading.
3 way problem
This brings Brazil back to the Trilemma of running the country.
That is the 3 way problem of stabilizing exchange rates, interest rates and the flow of foreign money in and mainly out of the country. Raise the already high interest rates to support the currency, at the risk of economic slow down, or lower them and risk inflation. Something Brazilians know an awful lot about.
“The reduction of inflation and the resumption of growth, all this is beginning to dissipate the grey clouds that had gathered over our country,” said Finance Minister Guido Mantega in September.
Brazil has set a target of four per cent growth in gross domestic product (GDP) next year, although that forecast depends heavily on conditions in the European Union and United States.
While President Dilma Rousseff said Brazil can deal with the surging dollar due to its high forex reserves, currently amounting to $372 billion.
With the Profit and Loss conference coming up in Rio in October 17th. I’m sure the decline in Real will be debated as a much needed correction rather than a fiscal crack in the economy, and God willingly 2014 will bring a brilliant World Cup victory
In India they have several Gods…. But that’s a whole other EM story.