The government’s actions follow Tuesday’s double swap intervention – reports suggest the central sold close to $2.2 billion in the forwards market – the effects of which were short-lived on the exchange rate. “The government is certainly stepping up its efforts to avoid further BRL depreciation, but we are not yet sure they will succeed,” says Marc Chandler, head of currency strategy at Brown Brothers Harriman.
“We still think that only a sharp change in global risk appetite can bring genuine relief for the BRL.”
Contrary to what many had believed, the recent actions from the Brazilian authorities suggests they are not targeting volatility, but are indeed uncomfortable with the weakness in the currency, marking something of a U-turn on previous rhetoric, and continued measures to stem BRL appreciation.
Brazil’s finance minister Guido Mantega, who coined the term currency war in 2010, was the most vociferous critic of the ultra-loose monetary policy in developed markets and the undesirable effect this was having on higher yielding emerging market currencies such as BRL.
Today’s tax cut to some extent contradicts Mantega’s comments shortly after central bank’s intervention on Tuesday that implied the government was comfortable with BRL depreciation by reaffirming that it poses no risk to inflation.
“The problem, as usual, is that the erratic style of official communication and action continues to confuse investors and inspires no confidence,” says Chandler.
“If it were a child we would call it hyperactive; if it were a trader we would fire it for overtrading; but it’s Brazil, so we just have to live with it.”