Brazil Underscores Commitment To Weakening BRL

By Win Thin

Brazil announced that it is allowing its Sovereign Wealth Fund (SWF) to trade currencies and currency derivatives (futures).  The SWF is managed by the Treasury, and so this gives the authorities another channel through which it can try to affect the exchange rate.  In his interview with the FT over the weekend, Finance Minister Mantega noted that the spot FX market is now in balance and that pressure on the real is now coming from the futures markets, and so we aren’t surprised that the table is being set for the SWF to buy and sell in the futures market.  It’s worth noting that the SWF will thus be making leveraged bets on the currency, and so there will be potentially more bang for the buck.  Reverse currency swaps are another tool that is probably being considered by Brazil, and we warn again that it looks like Brazil is very, very serious about countering BRL strength.  Selling these swaps is equivalent to buying dollars in the futures market, and the last time this was done by Brazil was back in May 2009.  

BRL is weaker on the day, and EM in general continues to trade softer.  Investors have been keen to buy BRL on weakness above 1.70-1.72, so it will be interesting to see if this buy-the-dip mentality remains in place.  We remain very cautious near-term, as EM losses could continue as things appear poised to worsen in the euro zone.  Recent FX moves by Brazil and Chile are also making markets nervous about pushing EM gains.  The last two significant EM corrections were May-June (Greece blowing up) and November-December (Ireland blowing up).  EM currencies always recovered subsequently and that is why any temporary softness on Portugal woes should be viewed as a buying opportunity for EM.  But there is no denying that no matter how good EM fundamentals are, the asset class remains vulnerable to swings in sentiment stemming from events in the developed world.

Brazil Foreign Reserves

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