Visiting Germany this week, Brazilian President Dilma Rousseff angrily claimed that she would use all the resources at her disposal to head off what she called a “monetary tsunami.” This tidal wave arrives at Brazilian shores in the form of investment.
In the recent past, such waves of investment would have been welcomed on these shores with open arms, like tourists arriving for carnaval. These days, however, as all expatriates know, monetary inflows mean only one thing: a stronger real. The stronger real, in turn, means more expensive Brazilian products abroad and a shrinking manufacturing base at home. A strong, vibrant economy simply can’t survive on the export of commodities like iron and soy beans alone.
Rousseff’s anger in this case was specifically aimed at what she called the “protectionist” policies of rich nations. As she put it, “Brazil as a sovereign nation will take all necessary measures to protect its economy.” Rumors have been flying in world financial circles about how far Brazil will go to protect itself from all the money wealthy nations are throwing at it. Some have even whispered that Brazil is about to institute a minimum time limit for investments, essentially setting up a financial “quarantine” of foreign funds.
Understandably, these rumors caused a little concern on the part of foreign investors who would not be able to repatriate their funds in case of a financial fall.
The question on many expatriate’s minds will be, “What exactly is Brazil about to do and what does this mean for the exchange rate in the foreseeable future?”
A report from Barclays Capital last week put things in context. Barclays argued that extreme measures like a time limit were simply not in the cards and Rousseff also dismissed that plan today in Germany. No, Barclays argued that until the real reaches 1.70 the Brazilians would just use their standard currency control technique—buying USD in the spot and derivatives markets.
So, can we expect to see the real drop below $1.70? Barclays argued yes, that after facing a barrier at $1.70 the real could drop further.
As they put it: It is when the USDBRL slips into the 1.65-1.70 range that the finance minister steps in, and we could see more creative intervention mechanisms being used. And, as we have seen in the past, the minister has a large range of instruments at his disposal, from new IOF tax hikes to sovereign wealth fund USD acquisitions.
I tend to agree. The real will continue to appreciate. It may not make it far beyond $1.65 in the short term, but I simply don’t see anything to cause a turn around. Until the rich nations start making money instead of talking about defaults, we will see this trend continue in varying intensities—keeping a constant pressure on the real.
This will come as bad news to some expatriates and will be downright painful to others. Still, know that whatever you own in Brazil gets more valuable by the day.