© The Financial Times Ltd 2014 FT and 'Financial Times' are trademarks of The Financial Times Ltd.
Just as other countries look like they are relaunching the global currency war – see Japan – it seems like Brazil may be tiring of its long-fought and ultimately unrewarding campaign.
After some inconsistent statements, Brazil’s finance minister, Guido Mantega, signalled on Friday that the government’s attention was swinging back to inflation.
The real weakened early on Wednesday after Brazil’s finance minister warned the government was ready to correct any excessive moves in the exchange rate, adding that a weaker currency makes domestic industry more competitive.
The country’s central bank intervened on four separate occasions on Monday to halt sharp declines in the real against the dollar, calling two currency swap auctions and two dollar auctions in the spot market.
It looks like the mighty real is on the march. After being confined in a “dirty float” of between R$2 and R$2.05 against the dollar for some months, Brazil’s currency closed at R$2.0985 on Wednesday, the lowest according to Bloomberg since May 2009.
There is now speculation the government could let the currency drift in a higher band, of say between R$2.05 and R$2.15 to the dollar after Brazilian President Dilma Rousseff told a local newspaper, Valor Econômico, that the real is “over-valued”.
The government’s rationale for such a move would be simple. Brazilian industry is struggling to recuperate after a strong currency, rising labour costs, increased competition from imports and other factors eroded its competitiveness in recent years.
For much of this year, the Brazilian real has been one of the world’s worst-performing currencies. That largely served Brasilia well: it wanted a weaker real to help boost the slowing Brazilian economy. Lately, though, the real has been clawing back lost ground; during the first half of August, it even outperformed its Latin American peers.
But this week the central bank decided it had had enough. After a lengthy market absence, it intervened on Tuesday to stop the currency from strengthening further. The magic number it seemed to be defending? About 2 reals to the dollar.
Bravo Mantega, you did it! On Monday the Brazilian real weakened past R$2 to the dollar for the first time since July 2009.
After touching R$2.0022 per dollar during the trading session, the currency closed around R$1.99, extending its losses for the year to about 6.3 per cent.
Those declines may have had more to do with the central bank’s recent easing cycle and fears over Greece, but for Guido Mantega, who has waged a war against Brazil’s strong currency for over two years, it means victory.
Brazil’s finance minister, Guido Mantega, should have been doing a victory dance around the IMF last weekend rather than threatening further capital controls, it seems.
According to the market, his government is actually winning the currency war. Brazil’s real was trading around 1.88 to the dollar on Monday – roughly its weakest level this year and almost 19 per cent weaker than its recent peak last July.
More good news for the government of President Dilma Rousseff on Thursday. Inflation slowed much more than the market expected in the 12 months to mid-March, easing to 5.61 per cent from 5.98 per cent in the previous reading.
This is supportive not only of the government’s policy of trying to quickly push down the benchmark Selic interest rate but of also another official priority – encouraging a weaker exchange rate.
It’s like September 2010 all over again. The real is up against the dollar, Brazil’s Finance Minister Guido Mantega is evangelising about a global “currency war” while his government introduces a series of rather ineffective capital controls.
On Thursday, Brazil’s government extended the 6 per cent IOF transactions tax to foreign borrowing of up to three years. Previously, the tax had only applied to loans with maturities of less than two years.
The Brazilian real has greeted last week’s European summit deal with about as much enthusiasm as a child being forced to eat Brussels sprouts.
The Brazilian currency lost 2.5 per cent of its value against the dollar to hit a two-week low of 1.8440 on Monday, amid concern over a weaker outlook for commodity prices.