Brazil Succeeds Beyond Wildest Dreams In Winning The Currency War
Mike (Mish) Shedlock | Mar 10, 2015 01:53AM ET
File this story in the category of "be careful what you wish for, you just may get it".
I am talking about Brazil, more specifically, Brazil's currency, the Real. Let's also investigate comments made by former finance minister Guido Mantega about the Real.
h2 BRL vs. US Dollar/h2
I highlighted the March 2012 candle because that's when Brazil Declared New Currency War on US and Europe.
“When the real appreciates, it reduces our competitiveness. Exports are more expensive, imports are cheaper and it creates unfair competition for businesses in Brazil,” said Guido Mantega, the finance minister who was the first to use the controversial term "currency war" in 2010.
My comment at the time was "Mathematically speaking, the desire for every country to be net exporters is impossible. Massive trade wars are on the horizon as a result."
h3 Flashback July 2011/h3
In July of 2011, in Credit Crisis in Brazil: Consumer Loan Rates Hit 47%, Defaults Soar, Debt Service Tops 50% of Disposable Income I posted an email from Otavio. He is from Brazil.
Otavio wrote:
Hello MishOtavio here, a Brazilian follower of your blog. Today I want to express my satisfaction as I read you latest post entitled Preposterous Statements - Jim Rogers: "No Food at Any Price"; Barton Biggs: " U.S. Needs Massive Infrastructure Program".
When I hear statements like these, it feels like the move up in commodity prices might be near the end. I cannot stress more the fact that high prices fueled by zero interest rates in developed and many emerging markets (for many years now) are a fruit of rampant speculation.
We have our own credit bubble here, which in my opinion has a good chance of busting sooner rather than later ....
For the record, I will say that in my opinion, Brazilian real estate, many local stocks, and our currency (the Real), are extremely overvalued as well.
Cheers
Otavio
At that time Brazil's Finance Minister, Guido Mantega announced "The government will continue to take measures to contain the over-valuation of the exchange rate."
I commented "I am inclined to agree with Otavio who says the Real is extremely overvalued".
Today, I declare victory on behalf of Mantega!
Get The News You Want
Mantega "won" his currency war. The Real was worth $0.65 in June of 2011. It is now worth about $0.32. That's a decline of slightly over 50%, and a clear "victory" over US forces allegedly conspiring to drive the Real higher.
Surely this is good for the Brazilian stock market. Right? In search of more victories let's take a look.
h3 iShares Brazil Index (ARCA:EWZ) /h3
The above chart does include currency depreciation. Straight up, the chart looks better.
h3Bovespa - Brazilian Stock Market/h3
What about interest rates?
h3Brazil 10-Year Yield/h3
h3 Brazil 1-Year Yield/h3
h3 Too Much Success/h3
To shore up the currency, Brazil has now had to hike rates. But note the yield curve inversion. Brazil 1-year bonds yield more than 10-year bonds, a clear recession signal.
This is what's known as "too much success". It's also too bad that Mantega is no longer around to receive my celebratory victory call.
Brazilian president Petrobras scandal threatens to scupper Brazil austerity drive .
Petrobras, the country’s largest company with a virtual monopoly over oil exploration in Brazil, is reeling from allegations that senior Petrobras executives accepted bribes from many of Brazil’s biggest construction companies in exchange for contracts.Much of the money was allegedly passed on to politicians, mostly in the ruling coalition.
The scandal is complicating an already difficult political and economic scenario for Ms Rousseff, who won elections last October by the narrowest margin in recent history. The PT’s main coalition partner, the PMDB, is now the largest party in congress and is trying to force Ms Rousseff to share more power.
At the same time, Ms Rousseff’s new finance minister, Joaquim Levy, is trying to set Brazil’s public finances back on track to avoid a sovereign credit rating downgrade after years of fiscal largesse.
Tension has focused on her appointment of Mr Levy, a University of Chicago-trained orthodox economist. His fiscal austerity programme, which includes trimming benefits and raising taxes and interest rates, is straining relations with more leftist elements in the party.
The Real's decline from $0.64 to $0.44 is not related to the scandal. Most of the decline from $0.44 to $0.32 is related to the scandal. Where it ends, I don't know.
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