Did Brazilian Finance Minister want to prompt a strengthening in the real currency in the wake dismal inflation data? If he did, he succeeded by giving traders a specific level to shoot for, a tactic that central bankers customarily eschew.
Did Brazil’s Finance Minister Mean What He Said About the Real?
By Charles Roth
Did Brazilian Finance Minister Guido Mantega want to prompt a strengthening in the real currency in the wake dismal inflation data? If he did, he succeeded by giving traders a specific level to shoot for, a tactic that central bankers customarily eschew.
Another possibility is that the market, befuddled by a constant barrage of intervention in the foreign exchange market, over-interpreted an exclamatory headline. This is what the minister said, in an interview with Reuters (in Portuguese):
“Ideally we wouldn’t have any intervention, but that’s a dream. Now, if there were another speculative trend, if people get excited and say: ‘let’s take the rate to 1.85,’ then we’ll be intervening again.”
The market’s making a leap if it thinks Mr. Mantega’s drawing a line in the sand–something he’s steadfastly avoided knowing the problems it can cause. It seems more likely that he was tossing out any number, without thinking twice, to make a different point.
Whatever the case, the real was catapulted higher against the dollar early Friday, no doubt causing Brazil’s exporters and producers for the domestic market to slap their collective foreheads. The episode highlighted the dangers of trying to manage an exchange rate.
Indeed, the Central Bank of Brazil was alarmed enough by the spike in the real to intervene on the dollar’s behalf. Even Mr. Mantega, perhaps sensing that he had overstepped, appeared to walk back his comments Friday, saying the government won’t tolerate a “speculative” depreciation of the dollar against the real, without citing any specific level this time. “The exchange rate policy of the government hasn’t changed,” he added. Thanks for that.
Speculation that the government would allow a stronger real grew Thursday after data showing consumer prices jumped at their highest monthly pace in nearly eight years, bringing the annual index to 6.15% last month, from 5.84% in December. That’s well above 4.5% inflation target, and moving perilously closer to the 6.5% upper threshold in the central bank’s tolerance range. A stronger real makes imports more affordable, helping to restrain domestic prices.
Mr. Mantega told Thomson Reuters the government could ratchet a financial transactions tax on dollar inflows or increase foreign reserves, which total more than $370 billion. “If there’s a speculative trend, we’ll increase intervention,” Mr. Mantega said.
Unsurprisingly, the real trampled the greenback early Friday, reaching BRL1.9530 a dollar, from Thursday’s close of BRL1.9720.
The central bank, which has repeatedly said it’s concerned about inflation but expects it to trend back toward the target in the second half of the year, sold $502 million a reverse dollar swaps, allowing investors to trade US dollar-indexed contracts for local-rate linked paper. The real has since retreated back to around its close of active trading Thursday.
“Today’s intervention reinforces our view that the range is drifting lower, but also that policy makers see low volatility as a condition necessary to promote a backdrop that is conducive for investments, and lower inflation expectations,” J.P.Morgan sa id in a note. “In all, the two steps forward one step back regime remains in place. Stay short USD/BRL .”
The real has been a roller-coaster, perhaps because authorities use interest rates to give Brazil’s lethargic economy, which grew an estimated 1% or so last year, a shot in the arm. The real shed nearly 10% of its value in 2012, but is up nearly 8% since early December.
(Matthew Cowley and Matthew Walter contributed to this post |
