By Peter Lavelle (from Pure FX).

Is Dilma Rousseff planning to let the real weaken?

This is one topic of conversation this week, following comments from her government that would suggest so, even as the Banco Central do Brasil defends the ‘soft’ trading band limit of 2.10 to the USD.

Speaking to local newspaper Valor Econômico last Wednesday (21st November), Rousseff said the Brazilian government was “looking for an exchange rate that is not this one, with a devalued dollar and an over-valued real.”

Then, just two days later (23rd November), Finance Minister Guido Mantega told a crowd of business leaders in Sao Paulo, “The exchange rate is at a reasonable level, still not entirely satisfactory.”

These comments set the real to the top of its ‘informal’ trading band, at 2.0985 on Friday, before the Banco Central intervened, selling $1.62bn in swap contracts to flood the market with US dollars, hence strengthening the real again.

So what reasons might the Rousseff government have for wanting to weaken the real?

The most important is a need to bolster Brazilian industry. Brazil’s manufacturing base has been hit hard by the global slowdown, with the European debt crisis in particular doing much to dent their profitability. Given that, a weaker real may help them regain competitiveness.

Furthermore, there is a perception inside the Rousseff government that the industrialised West is playing by ‘unfair rules’, with the unlimited quantitative easing being pursued by the  Fed and ECB unfairly weakening the dollar and euro against the real.

To this end, earlier this April Rousseff spoke of a “tsunami of money” coming from the West, while Mantega used his speech to the IMF in October to tell delegates, Brazil “will take whatever measures it deems necessary” to defend the real.

Yet, if there are good reasons for the Rousseff government to let the real weaken, there are equally good reasons to not let it happen. The chief of these is inflation.

Speaking this week, Wanderlei Muniz, a trader at southern Brazil’s Onnix, said that “a real weaker than 2.15 threatens to ignite inflation.” That will of course eat into Brazilian consumers’ purchasing power, and in itself diminish growth.

This perhaps explains why, following Mantega’s remarks in San Paolo last Friday, the Banco Central intervened to strengthen the real, and so prevent inflation spiralling beyond its control.

The Banco Central currently pursues an inflation target of 4.5%, with 2.0% leeway either way. In October, it was at 5.45%, toward the upper end of that target.

So will the Rousseff government let the real weaken or not? If it does, it’s clear there will be a price to pay, in the form of inflation. It’s just a question then of whether that’s a cost Brazil’s government is willing to accept.

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7 Responses to Brazil FX: Is Rousseff’s government planning for a new, weaker currency band?

  1. alexny says:

    Brazilian government wants everybody to think that they have absolute control of the currency exchange rate, when in reality they control the speed it devaluates only and only for a while , Investors have realized now that everything in brazil was a big lie , grouth , GDP , currency , new middle class , etc , all Bullshit, all artificial and now they are all taking the money out of brazil
    Adding that with the Carry trade and what you get is ., The Real will have its real value soon

  2. Rodrigo Rodrigues says:

    Countries around the world are devaluing their currencies in order to boost their exports  thereby increasing their GDP.However, such actions will frequently be met by mutual currency devaluation by other countries or by some protectionist policy such as tariffs. Therefore, countries will gain a temporary advantage until other countries retaliate, the end result of which will be: inflation brought on from currency devaluation, protectionism and the halt of free trade, thus – wealth destruction. 
    But stealing  growth from other countries by printing tons of money and cheapening one’s own currency comes with an enormous price tag.
    The Brazilian Govermeny is in the process of devaluing the realto increase Brazilian exports and to re-inflate the economy . Dilma’s efforts might work if it wasn’t for the fact that central bankers throughout the world are devaluing their currency to prevent the US from gaining an competitive advantage, hence a currency war.

    When central bankers debase their currencies commodities prices rise, which destroys the middle class. The rich can navigate through a currency war because they can buy real assets, but the middle class cannot because their savings are typically held in fiat currencies. 
    Currencies are not pegged to anything, and so various central banks can carry out actions such as devaluation to gain advantage over their neighbours, but because everyone can do this, there is no real advantage other than to the highly leveraged
    Currency wars begin in an atmosphere of insufficient internal growth. The country that starts down this road typically finds itself with high unemployment, low or declining growth, a weak banking sector, and deteriorating public finances. In these circumstances, it is difficult to generate growth through purely internal means and the promotion of exports through a devalued currency becomes the growth engine of last resort,The fact is that we are currently in a very interesting time.  We’ve experienced significant economic manipulation by most of the major governments of the world in an effort to halt the downward slide of the current depression. Whether or not that has been successful is probably a very personal discussion for you.
     The market is being pushed around by a kind of pressure that verges on it being rigged, because the folks driving markets for better or worse are politicians.
    Governments are trying to beat the market by smoothing it out with oceans of cash, hoping for a recovery; if you tried to do that as an individual, you’d be arrested.
    What compounds the problem this time is government is re-leveraging the system by taking on massive debt to prop up the private sector( World Cup, Olympics, Eike batista and his buddies),  leaving them vulnerable and unable to respond when the next crisis inevitably comes. Worse still, these “balance-sheet” crises hobble government finances resulting in anemic recoveries that drag on as happened in Japan in the 1990s and most recently on The United States.
    The sad reality is that Brazilian  policy makers have not yet learned their lessons from  The Americans , Europeans,  or history itself and are tinkering at the margins when a more massive overhaul is required.Lowering interesting  rates  has kept the economy from totally collapsing it is unsustainable and new bubbles are appearing in the form of commodities prices, which have surged greatly in price.
    Sadly they are not easy or palatable situations, and its all to easy for all three groups to ignore taking hard steps to reign in economic growth during robust growth periods. And that’s the problem. Societies are predicated on growth and expansion. We detest the idea of losing money, Today, the vast majority of our politicians are driven not by the sincere need to better society, based on a value system of rationality but by their hypocritical allegiance to their selective constituents at the expense of society’s welfare. The banks- the financial circulatory system of our economy, are run not by those who wish to create an economy most conducive to the nation’s well-being but by those who run private industries that wield the power to manipulate the movement of money. When selfish people are in an industry that allows a concerted funneling of money into their pockets, what outcome do you expect?
    these greedy money junkies want more for themselves they are a bunch of sick people and they are elevated to make it seem that they are geniuses , they are geniuses in making inside deals and dirty deals that’s what they are geniuses in , they create Nothing other than more money for themselves they produce Nothing .
    And no less, when these same institutions are backed by the very government  there is nothing other than absolute proof that corruption by any means have utterly destroyed the economic principles. Society may always evolve towards higher and higher ends, but only when there are ample counter-points to the aspects of the society that are flawed. The greater embeddedness of the problem, the greater the counter-force necessary to root out the problem.
    When the economy itself is hijacked by money manipulators under the guise of “Free-Markets” we are being none other than psychologically manipulated by language.

  3. McIvor says:

    The incompetents are at work again. Backward thinking Rouseff and her gang will learn the hard way that interventionism does not work.
    In Brazil there is no political will to change what is needed. Brazil eventually will go the way of Argentina. What a joke.

  4. frank stein says:

    ARGENTINA IS FOR OPTIMISTS. VENEZUELA IS MORE LIKELY. PRINTING MONEY IS COMING FROM THE WEST AND EAST. BOJ AND CHINA WILL GET INTO THE PARTY IN A BIG WAY. BUY GOLD. WITHOUT A WEAK REAL IT WILL BE IMPOSSIBLE TO HOLD JOBS MUCH LONGER. UNEMPLOYMENT WILL DESTROY DILMA’S GOVERNMENT. DON’T MESS WITH JOBS.IT IS EASIER TO CHEAT ON INFLATION NUMBERS AND KEEP THE BAND PLAYING, LIKE ARGENTINA.

  5. frank stein says:

    great video. quite accurate except for not mentioning corruption. corruption in brazil is the norm. it is necessary to pay bribes to get anything done. Almost all politicians are criminals but do not go to jail.

  6. John says:

    Really good comment by Rodrigo Rodrigues which explains what’s going on at the macro level. They succeeded to get the currency at least above the R$2,00 threshold. I have to say that from doing business there for a dozen years, it has never been more expensive, so this will help foreigners. It will also help exporters especially if it devalues further. A good source for finding Brazilian exporters and service providers is . While there may be bubbles in the Brazilian economy, the overall outlook is bright.

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