The Big Mac index suggests that currencies are particularly overvalued in Norway, Switzerland and Brazil (see chart). The continuing strength of the Brazilian Real is a big source of irritation to Brazil’s finance minister, Guido Mantega, who first trumpeted the phrase “currency wars” in 2010. Brazil battled back by introducing capital controls in the form of taxes on foreign purchases of Brazilian securities, but the currency remains overvalued.
According to FT, trying to understand what Guido Mantega is up to can be exhausting, especially when it comes to his favourite topic: currency wars.
It seems there are three possible explanations behind the authorities’ mixed messages:
1. They want a gradual appreciation of the real to curb inflation and Mantega’s warning was intended to moderate any sharp moves on the back of the central bank’s intervention
2. They have decided the real is at the right level and are sending out contradictory signals to stabilise the currency
3. They have no idea what they’re doing.
Most people we interviewed chose option #3.
Source: The Economist, FT