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SurReal: Brazil's Currency Stages Largest Rally In Seven Years On Central Bank "Whatever It Takes" Moment
Over the past several weeks, we’ve said on a number of occasions that even we have been surprised at how quickly the situation in Brazil has deteriorated.
To be sure, there are plenty of things for Latin America’s most important economy to worry about, including twin deficits on the fiscal and current accounts, persistently low commodity prices, FX pass-through inflation, rising unemployment, plunging consumer confidence, and a seemingly intractable political crisis.
That said, recent movements in the BRL seem to be telegraphing something worse than a transient crisis. Here's a bit of historical context:
Indeed, the pace at which Brazil’s flagging currency has weakened against the dollar over the past two weeks suggests the country may be headed for something like an outright economic cataclysm.
As it turns out, we aren’t alone in terms of being surprised at the scope of the rout. Here’s Bloomberg with some rather amusing color on the degree to which virtually everyone has been taken off guard:
As Brazilian markets went wild this week, trading desks fell silent.
Unlike previous scares that rocked Latin America’s biggest economy -- a 50-minute selloff triggered by a blackout, for example, or fear a corruption scandal is getting ever closer to the presidency -- this time around there’s no shouting as clients call to demand updates or computer screens explode with instant messages. Instead, panic has given way to a shocked silence as traders watch markets unravel, according to interviews with half a dozen brokerages.
“There’s a saying that helps explain our mood around here,” said Guilherme Esquelbek, a currency trader at Correparti Corretora de Cambio in Curitiba, Brazil. “When the sea is this turbulent, the only thing you can do is sit on the sand and watch. It’s not time to get in a boat.”
No, probably not, but anyone who got in the BRL boat as the currency hit new all-time lows on Thursday was swiftly rewarded when, apparently in response to central bank President Alexandre Tombini’s suggestion that Brazil may use its FX reserves to support the currency, the BRL staged its biggest rally in seven years:
Here's FT:
The Brazilian real on Thursday enjoyed its biggest rally in seven years after the governor of the central bank said he was willing to use “all instruments” available to policymakers to stem the currency’s recent slide.
After tumbling 1.7 per cent to a new low of R$4.2478 to the dollar earlier in the day, the real rallied by as much as 7 per cent intraday, ending a five-day losing streak. By late afternoon in New York the currency was 4.7 per cent higher, its biggest gain since November 2008 as it pared its loss against the dollar this year to 33 per cent.
On Wednesday the bank announced plans to auction $2bn worth of new currency swaps over two days — in effect restarting a programme that was scrapped earlier this year. Its president, Alexandre Tombini, on Thursday sought further to shore up investor confidence, hinting at deploying its $371bn of foreign currency reserves to buttress the real.
“In this process (to tame volatility), all instruments are available for the central bank. Foreign reserves are an insurance that could and should be used,” Mr Tombini said.
There is of course, nothing good about burning through reserves to support the currency which is why this is nothing but a knee jerk reaction to the Brazilian equivalent of Mario Draghi's "whatever it takes" moment. As one of the economists who helped to create the real told WSJ, "I am disillusioned and upset with what’s happening. All the work that we all did to create the real, to create stability, was destroyed by the government."
And speaking of the government, Eurasia analyst Christopher Garman said on Thursday that if Rousseff is unable to push through all of the needed reforms (i.e. austerity), the resultant economic turmoil will likely lead to her impeachment. "The sustained market selloff is likely to push President Dilma Rousseff to double down on structural reforms that address govt’s fiscal rigidities [but] if Congress doesn’t give any ground, crisis is likely to precipitate an impeachment," Garman notes.
Here's a full rundown of political and other developments from Bloomberg:
- PMDB congressmen, who had been promised two additional ministries, don’t want to accept just Health Ministry: Folha de S.Paulo
- PT wants Education Ministry: O Globo
- Vice President Michel Temer told President Dilma Rousseff that PMDB didn’t show that much support for govt in voting of vetoes this week: Folha
- Senate president Renan Calheiros called for a new joint session of Congress to continue voting on vetoes on Wednesday, Sept. 30, 11:30am
- Lower house president Eduardo Cunha says getting new ministries won’t help govt
- Cunha finds himself isolated within PMDB: Globo
- Some PT members calling for exits of Finance Minister Joaquim Levy, Chief of Staff Aloizio Mercadante and Justice Minister Jose Eduardo Cardozo: Folha
- Temer said in TV spot yday that country will prove to be trustworthy by correcting mistakes and uniting; Brazil is above any party interests: Valor Economico
- Brazilians are tired of footing the bill, PMDB said in the TV spot
- Lawmakers disagreed yday whether Rousseff can be impeached for misdeeds allegedly carried out in her previous term; PT congressman Wadih Damous said that would be unconstitutional
- Brazil volatility to persist until impeachment definition: Citi
- Brazil selloff is crucial moment for Rousseff survival: Eurasia
- Brazil could use reserves to damp currency volatility, Levy says
- Govt said to plan appeal if TCU rejects accounts: Estado de S.Paulo
- Rejection of fiscal accounts would be the first in history
- Member of the court suggested that govt appeals decision to delay possible start of impeachment process by Congress based on unfavorable ruling, newspaper says
- Temer and former President Luiz Inacio Lula da Silva believe Rousseff will finish her term: Valor Economico
- Former President Fernando Henrique Cardoso: Rousseff making “deal with the devil” by offering PMDB posts before doing reforms
- Former Finance Minister Guido Mantega suggested cutting spending in March 2014, Valor columnist Claudia Safatle says
- Rousseff refused saying she would lose the election, Valor says without identifying sources
- Fitch met with DEM party leader to assess political risk
Ultimately, all of this will manifest itself in further BRL weakness unless commodity prices suddenly mark a dramatic reversal and/or the political situation stabilizes overnight. The only other option - and, incidentally, this is the case in Turkey as well - is for the central bank to hike, and quick. On that note, we close with the following from James Gulbrandsen, chief investment officer for Latin America at asset manager NCH Capital, who spoke to Bloomberg:
“The blood is in the water and the sharks are swarming. [Copom] can harpoon them with one swift interest-rate increase and this current crisis ends.”
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The Real has taken a real shit kicking over the last 12 months, and is likely grossly oversold at this time. Longer term.....
Yep, just a temporary reprieve is all it is.
"central bank President Alexandre Tombini’s suggestion that Brazil may use its FX reserves to support the currency"
Yes, because that's always worked out so well in the past. Couple months later, reserves depleted, collapse resumes.
She is made of iron, sir. I assure you, she can and will sink. The pumps only buy you time, nothing more.
Careful NoDebt, you are sitting in the world's largest Glass house, so stop chucking stones.
Brazil has been screwed as has most of the world due to dollar's oil bound reserve status.
The good years enjoyed by you have been on the backs of the rest of the world.
Everyone will be taking these painted in a corner type decisions soon enough, the US will be the last and worst....
So let me get this straight: it's the fault of the US that credit has expanded to such an extent in Brazil? It's the fault of the US that Brazilian companies have taken on so much dollar-denominated debt?
The US has made plenty of mistakes, but I don't recall anyone in the US forcing EM countries and companies to assume such massive dollar-denominated debt. Over $3 Trillion has been assumed in recent years.
Aaaaaaaaand,... it's gone,... it's all gone.
http://www.kitco.com/gold_currency/index.html?currency=brl&timePeriod=d&flag=exchangeRate&otherChart=no
Not to mention the political corruption of Brazil's largest "business" - Petrobras.
Exactly. They will need those reserves to shore up domestic financial institutions.
Its about time Brazil sold some garbage US debt while its worth something.
cramer sounds more & more like a little bitch ever since bullard crowned him with the dunce cap.
sorry jimbo, many of these "companies" would not & should not exist IF we had rate NORMALIZATION.
he can flip, spin, and juggle it any way he wants it - ZIRP is not fucking normal and it ROBS from those who truely did build this country. our seniors are being robbed of their retirement and our youth are going to be completely fucked because all this ZIRP is doing is enabling these dickheads in washington who can't/won't make the difficult decisions to get on the track of financial stability.
to cramer, the free $$$ drug just still tastes too good.
With oil prices so low and commodity prices showing no chance of rallying from 11 year lows, what will save Brazil?
Every recovery in the Real will be followed by a lower low.
There will be riots and political turmoil soon due to high inflation caused by the falling Real.
Brazil’s Death Spiral Accelerates——No Light At The End Of The Tunnelhttp://davidstockmanscontracorner.com/brazils-death-spiral-accelerates-n...
"I am disillusioned and upset with what’s happening. All the work that we all did to create the real, to create stability, was destroyed by the government."
Yeah no shit. That's what governments do, they destroy things,
Amazing that people are still shocked when this happens. It might be the most often repeated lesson of history, but few ever seem to learn it.
That's what floors me. People always think, "not our governemnt" then they are shocked..., shocked to find out that their government is no different than any that's come before them.
I blame education. Especially government funded education. Like little socialist indoctrination factories.
i well know, o Jehovah, that to earthling man his way does not belong. it does not belong to man who is walking even to direct his step. jer 10:23.
if you ponder that for a bit, it makes a lot of sense of mans history
Isn't unbelievable that some people actually think governments create things? SMDH
All this talk of shuffling ministries, rearranging the furniture on the Titanic...
German government has totally fucked the country beyond any measure with immigration from half the bloody world.
This is going to end in blood and tears. It will make the rebuilding efforts and hunger years post WW2 look like a picnic.
What goes down must go up?
Desperate Dilma
If only stating the obvious would net such rewards in the real world.
Presenting the Draghi Gambit.
"Hi. You're the most beautiful woman I have ever seen. You're clearly out of my league by any measure. But, I will do whatever necessary to win your body and mind.
"Take me now".
Dilma, Cristina and Pope "Evita" .... why can't Latins get beyond 19th century Marxism .... what kind of a mental time warp .... do they wallow in ..... and they think they're cool .... and on the vanguard of the future .... I understand blacks don't have the intellect .... but, I was hopeful the Latins had more going on upstairs ?
19th century Marxism is what gets them elected
majority of people will always chose the guy who offers the most candy
people are stupid sheep and politicians just take advantage of that
everything is a racket
any free shit for the sheep comes from their future with interest going to the wolves.. as long as the sheep keep breeding, the wolves can keep feeding
Monetas- Perhaps Joseph Conrad offered a glimpse in the direction of an answer to your question when he wrote:
"It's queer how out of touch with truth women are. They live in a world of their own, and there has never been anything like it, and never can be. It is too beautiful altogether, and if they were to set it up it would go to pieces before the first sunset. Some confounded fact we men have been living contentedly with ever since the day of creation would start up and knock the whole thing over."
I've tried to think of the idea Conrad could have been implying for a long time, with more or less success. My best guess right now is to think Cyndie Lauper gave the best answer when she sang, "Girls Just Wanna Have Fu-un!"
They should reject Marxism and sign up for Crony Capitalism instead, it has done wonders for us sheep here in the USA.
It's amazing nobody learns anything from watching anybody else. They just have to try, no matter what, to light their fireworks with the same wet matches.
NOT A SURPRISE that Brazil will try to apply a "tourniquet" to stop the loss of blood (currency plunge). The bloodbath in the REAL/DOLLAR is serious. But ultimately, it won't do any good.
Look at China, and their massive attempts to fudge their own stock market losses and shift their currency peg. The costs to China have been absolutely enormous, and their successes have been mediocre. So if a country like China cannot fight these fund flows, what chance do you think the Brazilians have got?
Anything the Central Bank of Brazil can do ... is stopgap.
As if by magic, thanks to Tyler for answering my question asked in an earlier thread as to why the BRL took a sudden move upwards overnight.