Real Falls to a 3 Year Low As Government Believes It Is Overvalued

The major currency of Brazil, Real has fallen to a 3rd year low. The currency experienced a slid of 0.6% and is valued at 2.0926 per USD currently. This is the lowest value of Real against USD since May, 2009. The swap rates on that contracts which are due in January, 2017 rose by 6 basis points and is at 8.79% currently. The investors are currently betting for a weaker Real. If the Real gets weaker further, the foreign products will become way more expensive for common Brazilians though.

The President of Brazil, Dilma Rousseff recently stated in an interview that he believes Real is already overvalued. This comment of Rousseff generated speculation that the Brazilian Government is not going to take any action to avoid any further depreciation of Real. According to analysts, the Government will let the currency drop below 2.1 per USD as there is a spur on demand for a refuge in the USD. This may hurt the several Brazilian companies which mainly operate in USD for their daily expenses.

According to Alfredo Barbutti, Liquidez DTVM Ltda.’s economist, the Government is currently wishing that Real goes further down. However, there are other opinions as well. Marcelo Salomon, an economist working for Barclays Plc. stated that Rousseff didn’t make the statement to signal further depreciation of the currency. Rather, she was referring to the earlier exchange rates of the currency. Marcelo added that Rousseff supports a stronger hand in the market so that it is guaranteed that the currency will continue to be traded at the current levels. However, Rousseff doesn’t want the market to get jawboned to force any change in range. According to Marcelo, the validity of his views will be tested by watching what actions the Central Bank of Brazil takes within the remaining days of this month.

In an attempt to support the exporters, since last August, the Central Bank of Brazil has continued to sale revere currency swaps. This has helped to keep the Real on a weaker zone (More than 2 Real per USD). The bank sold $350 million, $5.7 billion, $1.3 billion, $1.6 billion and $1.4 billion of contracts on 21st August, 17th September, 5th October, 23rd October and 25th October respectively.
Guido Mantega, the Finance Minister of Brazil implemented a levy of 6% on local debt in 2010. It was done in an attempt to curb the Real’s appreciation at that time. At that time, Mantega referenced the term “Currency War” for the first time and described the usage of a proper monetary policy to ensure that exports get the proper boosts.

In October, Mantega stated that the Brazilian Government will take all the necessary actions so that the selfish monetary policies of some of the developed countries can be combatted. According to Mantega, those countries are trying to hurt the Brazilian economy by giving Real a push. Incidentally, Real’s fall today is the biggest among all the emerging market currencies.

Central Bank of Brazil went ahead with currency swaps in May and June this year. According to many analysts, the Central Bank can go for another currency swap at this time as this seems a more logical option.

The target lending rate of this Latin American country has been reduced by 5.25 percentage points by the Government. This marks the lowest value of this rate since August, 2011 (It is at 7.25% currently). Brazil’s economy is expected to growth at a rate of 1.5% this year and to stimulate the process, the Government has gone ahead with reduction in taxes and stepping up the public spends. The President of Central Bank, Alexandre Tombini already confirmed earliest this month that the bank will try to keep rates low for quite some time, thereby balancing between slower inflation and faster growth.