Currency wars, the sequel

Brazil is back on the currency warpath after a truce with markets.

It’s all about the relentless rise of the real. Over the last three months, it has trended up from the 1.85 mark against the greenback to around 1.72 on March 5 although more stability has been seen over the last weeks. A wave of protectionist from across the Brazilian industrial base is leading to the opening of ever more anti-dumping investigations. Even the Brazilian wine industry is not immune and calling for import taxation to be doubled to over 50%.

The currency rise is leading to a concerted drive to dampen fixed-income investments. Veteran finance minister Guido Mantega and president Dilma Rousseff squarely assign the blame for a ‘flood of foreign currency’ on rich country policies. Rousseff has been on the stump, criticizing what she sees as overly tight fiscal policies coupled with very loose monetary policies in the rich world. At the same time, Brazil has been negotiating hard with the Chinese government to impose restrictions on its exporters to Brazil to stem a relentless hollowing out of Brazilian industries.

What does this mean for investors? This is probably a prelude to more measures to curb fixed-income investment. The March 1 decision to widen the catch of the hated IOF financial transaction tax is designed to curb short-term speculative investments and will see the 6% tax extend from two to three years. Other measures may involve curbs on derivative speculation.

Brazil has the powerful weapon of lower interest rates in its sights too as the Central Bank aggressively pursues its rate cutting policies. Real rates remain some of the highest in the world at some 4%, but that could be slashed by as much as 1% in the next meeting of the rate setting committee, Copom.

The clear risk is an over-zealous rate cutting exercise that allows the inflation genie out the bottle. There are, however, positive signs that inflation is decreasing with an inflation rate of just 0.07% in February recorded in São Paulo (down from 0.66% month over month). It’s a gamble to cut rates too fast but one that Brazil seems poised to win.

About admin

I've been researching and writing on Brazilian financial markets, industry and economy since 2006 for a wide range of specialist media, consultancies and investors. Before that I spent over 10 years in London and New York writing for and editing magazines and journals dedicated to finance, investment and economics in developing markets, mostly for the Euromoney Institutional Investor group and Thomson Financial. Areas of coverage Below are samples of areas that I cover and some of the common themes that I investigate. Capital markets BM&FBovespa markets *capital raising trends: via equities (IPOs and secondary issuance), debt and loans *the asset management industry: legislation and coverage of the key hedge, pension and investment funds * corporate governance: how the regulator is seeking to strengthen best practice and limitations * debt markets: the nascent corporate markets, attempts to boost liquidity and new insturments. * private equity market: why this market has been so successful, who’s involved. *electronic, high frequency trading and alternative trading platforms: what does the future hold? Banking *credit: the growth of consumer and business credit and competition between banks and models *Public versus private: the role and market share of public and private sector banks and the politicization of the industry * internationalization: which Brazilian banks are expanding overseas and where * investment banking: the growth of the domestic market and who’s winning which mandates *regional banks and development banks: what role they play in the industry and how they compete Mining *licensing: the complex process of obtaining environmental, water, land and operating licenses at a state and federal level. * capacity: the feasibility and sustainability of capacity increases * financing: how miners are raising finance in Brazil and abroad *competition: the interplay Vale, MMX and junior miners *logistics: rail, road and port connections Oil and gas: the fund raising issues related to the massive of pre-salt (link) Multilatinas: Who are they and how and where they are expanding Meatpacking: Are debt burdens sustainable, what are the different business models for areas such as branding and distrbution Agriculture: How are farms consolidating, what are environmental risks, how can foreign investors be involved. IT and software: Can Brazil take on India and build a viable long-term IT industry? For more information on clients and work, please see the media and consultancy sections.
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