Reserve Requirement Eased Down by Brazilian Government to Boost up Real

Real, the major currency of Brazil is definitely one of the worst performing currencies in 2012 and to boost the same up, the Central Bank of Brazil has reduced the reserve requirements on the short Dollar positions held by the local Brazilian banks.

The decision will be implemented starting from 20th December. As a part of the decision, banks will need to make a deposit in cash at the Central Bank 60% of their short positions in USD above $3 billion. Earlier, a limit was set at $1 billion or anything more than the capital base. The decision was announced by the Central Bank through an officially released statement. This news was good enough to strengthen Real as the same surged 0.2% ahead against USD today. 1 USD currently costs 2.0992 Real. Real incidentally has declined by 11% in 2012 and this is the worst performance of the 16 most traded currencies all over the world.

For the last 2 years, Brazil Government has been imposing controls over the capital; however, they have now decided to loosen the same. A 3-year low value for Real on 30th November prompted their decision. The Brazilian economy also grew at half pace than expected in 3rd quarter of 2012. The initial estimate for this time period was of 1.2% growth, but, it was 0.6% in original and therefore it was clear that the Government efforts of reviving investment were in vain. The Departmental Head of Economic Research at Central Bank, Tulio Maciel stated that this Latin American country was facing a similar situation that of the early half of 2011 and at that point, a decision was taken to slow down the capital inflows.

Maciel also announced that the short Dollar position of the Brazilian banks was at $3.65 billion. The long Dollar position for last month was $914 billion. Incidentally, in December, 2010, the short Dollar position was at $16.8 billion, but, after that, the policy makers decided to introduce reserve requirements so that the bets against Dollar can be deferred.

According to the Head of Fixed Income department of Banco WestLB do Brasil SA, Ures Folchini, the USD is currently at a new level altogether and hence, the Brazilian Government is thinking of cleaning the house as soon as possible and expects Real to perform better in turn.