Three Years After Warning Of "Currency War", Brazil Goes All In
In September 2010, Guido Mantega coined the phrase "currency war" as he proclaimed the world's central bank's FX interventions were dangerous for citizens' purchasing power and would lead to a vicious circle of competitive devaluations. In March, Mantega unleashed a mini-war by taxing foreign borrowings and threatening capital controls. But this week, after the BRL devalued over 26% since March as Fed Taper talk and EM capital flight takes hold around the world, Brazil has waded into the world's currency war with the largest currency intervention the nation has ever planned. Following a dismal current account deficit print, as The FT reports, "Brazil will launch a currency intervention program worth about $60bn to ensure liquidity and reduce volatility in the nation’s foreign exchange market" - offering USD500 million per day in currency swaps to support the Real. But, as Citi warns, it does not fix any of Brzail's problems.
"With the objective of providing currency hedging to economic agents and liquidity to the currency market, the Central Bank of Brazil will start, from this Friday... a programme of currency swap auctions and the sale of dollar repurchase agreements,” the central bank said late on Thursday.
While initially welcomed by the Brazilian government, the real’s rapid depreciation against the dollar has started to make policy makers nervous given the danger that it could add to already resilient inflation.
Luciano Coutinho, president of the Brazilian Development Bank, the country’s main long-term lender, said on Thursday the currency’s fair value was probably between R$2.20 and R$2.35 to the dollar – on Thursday it closed at R$2.44.
Among the major emerging markets currencies the real is the second-worst performer against the dollar this year, with only the South African rand losing more value.
“It’s highly probable that we are entering a lasting cycle of a stronger dollar that will tend to create favourable conditions in the medium term for our competitiveness,” Mr Coutinho said.
Brazil’s central bank said in its statement that it would on Monday to Thursday offer $500m a day in currency swaps to support the real, while on Fridays it would sell $1bn on the spot market through repurchase agreements.
“If judged appropriate, the central bank will take additional measures,” the bank said in the statement. The programme, which will last until December, follows intervention this year by the bank through derivative markets and other means worth about $45bn.
It stands in contrast to the currency controls and other methods adopted by the government during its so-called “currency war” – its campaign to stop the real from over-appreciating against the dollar at the height of the US Federal Reserve’s quantitative easing programme in 2011.
However, Citi's FX team has a word of warning...
The announcement of intervention in Brazil is fairly large at up to 36bn USD in derivative intervention up to the end of the year. As a reminder, in 2008/2009 the BCB sold 14bn USD in spot and auctioned 33bn in FX swaps.
The current program is also large relative to the current account deficit less FDI.
Of course, it does not fix any of Brazil’s problems.
Even though they do think in the short-term it will help...
largely because the global scene is also getting somewhat better on the margin with US Treasury yields potentially calming down and the China data looking better...
So Brazil is getting a bit lucky on this front. But how long with that last?
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