Brazilian real touched a weak point of R$2.63 against the dollar as investors made for the exits, worried that Ms Rousseff would continue with her expansionary fiscal policies and price controls, placing at risk Brazil’s investment grade rating.
Last updated: December 4, 2014 5:11 pm
Steady as she slides for Brazilian real
Joe Leahy in São Paulo
When Brazil’s central bank this week stepped up the pace of its interest rate tightening programme , it somehow managed to deliver both a hawkish and a dovish message at the same time.
Hawkish because it doubled the pace of tightening by raising its benchmark Selic rate by 50 basis points to 11.75 per cent. Dovish because it accompanied the move with a statement saying future monetary policy efforts should be “implemented sparingly”.
The move caused confusion in markets, which had been predicting a sturdy tightening cycle, with the dollar strengthening slightly against Brazil’s real in early trade on Thursday, up 0.9 per cent to R$2.57.
“There will be a bias for higher dollar/real,” Santander said in a note on the rate increase. But it said with the Selic rate now so high, it would make the carry trade on the real more attractive.
In spite of the confusion over the central bank’s statement, its actions at least spoke louder than its words. Brazil is in tightening mode.
Not only at the central bank but across the government, there is talk of greater austerity.
New finance minister Joaquim Levy, who is set to begin working on January 1, has promised a return to stouter primary fiscal surpluses — the budget surplus before interest payments.
All of this means that the trend for the real, which is already set for depreciation with the fall in the prices of Brazil’s main commodity exports, such as iron ore, should be for a slower and steadier slide rather than a rout.
“The trend is for depreciation, there is no way out?.?.?.?The question is whether we will move to the new levels for the real in a disorganised or an orderly way,” said Carlos Geraldo Langoni, a former central bank head.
“The good thing about Levy is that it will probably be in an orderly way.”
Until after the October 26 presidential election, which incumbent Dilma Rousseff won by a narrow three percentage point margin, the Brazilian real was one of the worst performing among emerging market currencies.
It touched a weak point of R$2.63 against the dollar as investors made for the exits, worried that Ms Rousseff would continue with her expansionary fiscal policies and price controls, placing at risk Brazil’s investment grade rating.
But the appointment of Mr Levy, presently the head of private sector fund manager Bradesco Asset Management, seems intended to mark a turnround in policy with the aim of ensuring the country does not lose the prized credit rating that he helped build during a previous incarnation as treasury secretary.
He immediately re-established targets for the primary surplus of 1.2 per cent in 2015 and 2 per cent or more for the following two years, up from near zero this year.
“Everyone accepts that there will be an adjustment but it will be gradual adjustment,” says Flavia Cattan-Naslausky, a currency strategist at RBS. “It is going to be difficult in terms of economic growth next year but I think a lot of downside is now priced in — the risk could be on the upside.”
The scale of the task of turning around Brazil’s fortunes, however, is gargantuan and growing larger by the day.
The country’s consumer boom is mostly spent, inflation is near the top of the central bank’s already generous target range of 6.5 per cent and is expected by economists to remain there next year.
The country faces the risk of an energy crisis next year because of low rainfall in watersheds feeding its hydropower dams, which could further affect inflation and reduce growth.
With commodity prices falling, a recovery will depend on restoring direct investment but it will take time to recover investor confidence after four years of adversarial relations between the government and the markets.
“The Brazilian market and currency remain highly volatile,” says Heinz Rüttimann, emerging market analyst at Julius Baer, the leading Swiss private banking group, in an emailed comment.
He says there is a “backlog of inflation drivers” that will maintain inflation and interest rates at high levels for the next year.
“The fiscal deficit is at a record high. The government’s forecasts to reduce the deficit are too optimistic.”
Still, the strong carry trade on the real with interest rates of almost 12 per cent compared with near zero in the developed world should help keep the currency steady against the US dollar in the near term, says RBS’s Ms Cattan-Naslausky.
The central bank has also been able to cushion volatility in the currency through a swaps programme, although there are signs it is looking to reduce the size of the intervention.
Ms Cattan-Naslausky is expecting the currency to trade around R$2.60 for the time being.
“The way I want to trade Brazil is still as a carry trade that can be in the portfolio,” she says. |
