Saturday, March 5, 2011

Currency Wars Round IV: Brazil Readies New Powerful Carnaval Salvo

This week the Brazilian real reached its highest level since 2008 at 1.65. Concerned about the new round of appreciation, the government is preparing new powerful measures to come into effect very soon. They will be drastic. Finance minister Guido Mantega and Central Bank president, Alexander Tombini, discussed the issue in recent days and new initiatives are nearly ready.

There are good chances of it happening right after the carnival. "It will be a strong measure," sources said. To deal with the Brazilian currency, the government has already increased twice the Tax on Financial Operations (IOF) for foreign investments in fixed income (to 6%), has changed standards to limit the stake of banks in the real, has instituted reverse swaps (instruments equivalent to buying dollars in the futures market) and also created the term foreign exchange auction, which is an operation done in a day with delivery at a future date.

Among the measures that may be used to tackle the "currency war", to avoid currency appreciation and ensure the competitiveness of the Brazilian export sector, is the purchase of foreign currency through Brazil Sovereign Fund (FSB). The government is authorized to operate with the FSB, but not yet made purchases.

Another possibility is the adoption of exchange control measures, such as a sudden elevation of the IOF in the capital inflows into the country, or measures feared by the foreign market, which is the imposition of a quarantine for capital inflows.
Yesterday, the dollar closed trading below $ 1.65, the latest informal floor that had been successfully defended by the government. For the week, the cumulative decline is 1.14%.
The movement of the dollar is occurring in several places in the world because of the low interest rate and currency issues in the United States. Thus, many domestic companies have sought to raise funds abroad, which helped inflate the numbers of the flow of dollars in the first quarter of 2011 - in total, the exchange flow in January and February, still missing a day to close to the result the month , surpassed the $ 20 billion.

Moreover, Brazil has been a popular destination for foreign capital because its economic growth is one of the world's strongest, and because of perspectives on major events like World Cup and Olympics, and the exploitation of oil in the pre-salt.

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