Central banks have been intervening heavily in the currency markets. The Swiss National Bank intervention has been the most notable. Emerging markets are even selling U.S. dollars to stabilise their currencies.Surprisingly exporter nation, Brazil that could benefit from currency depreciation, has intervened as well.
Brazil’s intervention is almost a reversal of its policy. The Brazilian real hit a 12-year high against the U.S. dollar in July but fell 11% this month.
Its central bank sold dollars on Thursday by allowing investors to exchange contracts indexed to domestic interest rates with paper linked to American dollars. The central bank’s monetary policy director told Dow Jones Newswires that Brazil would continue to sell U.S. dollars in the local currency market through futures and spot auction as long as there was need for liquidity.
Here’s why this is interesting. Brazil has previously butted heads with China over the latter’s policy of pegging the yuan to the dollar to keep its exports cheap. In fact, it has imposed anti-dumping duties on Chinese imports, and has repeatedly spoken of ‘currency wars’ and has pushed countries to stop manipulating their currencies.
Additionally, slow growth and interest rates in developed countries like the U.S. have also caused the real to appreciate, affecting the cost of Brazil’s exports.
If we backtrack a little, on August 31, its central bank surprisingly cut interest rates and attributed the move to a slowdown in the global economy. At the time, a statement on the central bank’s website said:
“Reassessing the international scenario, the Copom considers that there was substantial deterioration, materialised, for instance, in generalized and significant reduction in growth projections for the main economic blocks…
…For the Copom, the transmission of external developments for the Brazilian economy may materialise through several channels, among others, the reduction in the current of trade, moderation of the investments flow, more restrictive credit conditions and deterioration in the consumers and businessmen sentiment.”
Some of the recent strength in the dollar has been attributed to investors pulling funds out of emerging markets, after the Fed warned of worsening global economic outlook. While Brazil is defending its currency, it is unlikely to stop the decline of the real or let it appreciate like before. It’s most likely an attempt to control the decline.
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