Brazil’s finance minister, Guido Mantega, has lashed out at the U.S. saying, “We’re not going to allow our American friends to melt the dollar,” according to The Telegraph.
Mantega says his country can “manage the entry of speculative capital,” (capital controls) in order to combat the real’s rise against the dollar.
Mantega can’t be too happy. His country has been labelled the “loser” in the currency war by Nomura. Taking into consideration the exchange rate, interest rates, and inflation, Nomura found that Brazil was in much worse shape than 6 other major emerging markets.
And what’s worse, Brazil’s declared means of fighting the war aren’t working at all.
Why does Brazil stand out as the biggest loser? The attempt to hold back nominal appreciation of BRL through capital controls (the IOF tax) has proven to be ultimately unsuccessful because of changing policy emphasis over time. By holding back BRL, the inflation pass-through of higher commodity, especially food, prices has been large, leading to an appreciation of the real exchange rate. Now faced with higher inflation, the BCB is signaling that it will likely hike interest rates this month, which has led to another round of nominal appreciation, undoing the effect of the IOF tax on the exchange rate.
All that capital controls have done for Brazil is make the situation worse. Now food prices are spiking, and it’s hitting home with Brazil’s poor. There’s also the potential for a credit problem in Brazil’s banks as inflation and interest rates increase too.
Maybe it’s time Brazil changes their tact and target competitor China, like they suggested.