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Brazil’s large derivatives market allowed the central bank president to intervene in the currency through swaps. The $60bn campaign was underwritten by Brazil’s large external reserves, which have risen more than 12 times since 2000 to $373bn.
The real, which had tumbled 15 per cent from the beginning of the year, heading for R$2.50 to the dollar, immediately reversed its losses.
But today there are questions over whether the programme was too successful. The real has come back to R$2.17 to the dollar, up 13 per cent on August, leading to market rumours of tensions between the central bank and the finance ministry, which wants a weaker currency to help Brazil’s flagging industry.
“One side always wants lower inflation while the other side wants more competitiveness,” said Tony Volpon, economist with Nomura.
Now, the knock-on effects of the political debacle in the US over whether to raise the nation’s debt ceiling seem likely to delay “tapering” further, at least to the start of 2014, leading analysts to predict a revival of carry trades in EM currencies.
For some countries, the delay of tapering is a welcome reprieve: it will give policy makers in India and Indonesia, for example, more time to convince investors that reforms to narrow current account deficits and liberalise capital markets are working.
Others will be less keen to see a fresh flood of easy money. Traders believe thecentral bank of South Korea – which must contend with Japanese exporters revelling in a much weaker yen – intervened heavily to stop the won rising too fast against the dollar.
Mr Tombini faces an especially acute dilemma. Under his intervention programme, he committed to daily currency swap auctions and weekly repo sales at least until the end of the year.
With tapering on hold, analysts at Barclays said: “The pre-announced [central bank] strategy to sell derivatives . . . has helped not only contain the pace of depreciation but has also added pressure to keep the currency strong.”
Emerging markets are taking a battering as investors withdraw at the prospect of higher global interest rates
One man who will be particularly vexed by the stronger real is Brazil’s finance minister, Guido Mantega. As part of his “currency war” in 2010, he backed a web of currency controls in Brazil to try to weaken the real against the greenback, which was depreciating on the back of the US Federal Reserve’s quantitative easing programmes.
A meeting last Wednesday between Mr Mantega and Dilma Rousseff, Brazil’s president, fuelled speculation that the central bank might come under political pressure to scale back its intervention. When the central bank was late that day in announcing plans for the daily swap auction, the real fell sharply – showing how sensitive the market has become to any hint of a change in policy.
For the central bank, the stronger real is a powerful weapon in its bid to contain inflation, which has been running in the upper range of its target of 4.5 per cent plus or minus 2 percentage points. Mr Tombini and his fellow directors have repeatedly raised rates to tackle inflation but their efforts have been countered by a fiscal stimulus from the government, which needs to spur growth and jobs ahead of an election next year.
“Whether there is outright discord between the central bank and the finance ministry, the fact is they need to contain inflation somehow and the central bank is finding a way to do that through the exchange rate,” says Flavia Cattan-Naslausky of RBS.
She argues that the problem is an old one – too many “policy objectives”. The government is trying to provide a fiscal stimulus, reduce inflation and weaken the currency to promote competitiveness, all at the same time.
Nomura’s Mr Volpon said the government’s objectives were not necessarily conflicting – it was just a matter of timing. First priority should be to restore the central bank’s credibility on controlling inflation, after which the currency could be allowed to depreciate to promote industry.
“The more sophisticated debate is the one about timing and sequencing,” he said.
As to whether there is really a conflict between Mr Mantega and Mr Tombini, many in Brazil are sceptical. Both take their orders from the nation’s overbearing president, Dilma Rousseff, said one fund manager in São Paulo, dismissing rumours of the rift.
“I know the gender of the real central bank president and finance minister and she is a woman,” he said.