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Shaun Richards
Brazil has its very own currency war
1 month ago




This week has been one where the political topic of impeachment has affected financial markets. Like so many things these days it started with the Donald but then as the week developed headed south to the sound of samba music. From the BBC.

Brazilian President Michel Temer says he will not quit, amid allegations he authorised paying bribes to silence a witness in a huge corruption scandal……….Opposition parties have been demanding snap elections and his impeachment.

This would add to the impeachment of the previous President Dilma Rousseff in what must now seem something of a conveyor belt to ordinary Brazilians.

The Real

As events unfolded I was reminded of the famous statement from Brazil’s Finance Minister from September 2010.

“We’re in the midst of an international currency war, a general weakening of currency. This threatens us because it takes away our competitiveness,” Mr Mantega said. By publicly asserting the existence of a “currency war”, Mr Mantega has admitted what many policymakers have been saying in private: a rising number of countries see a weaker exchange rate as a way to lift their economies. ( Financial Times)

Back then he was complaining mostly about the US Dollar which had fallen by around 25% against the Brazilian Real as the US Federal Reserve expanded its balance sheet after large interest-rate cuts. Well presumably he would have been happier with what happened yesterday although probably not the cause.

The real tumbled 8 per cent to 3.38 against the US dollar, wiping out all of this year’s gains and taking the currency back to its level of last December. The real had been trading below 3.10 to the dollar as recently as Wednesday.

If we look back we see that Finance Minister Mantega has in more recent years much to cheer if he was a fan of a lower currency. Back in September 2010 when he made his speech some 1.7 Reals purchased a single US Dollar so approximately half the current rate. In fact the Real had been even lower as it had fallen to more than 4 versus the US Dollar in late 2015 and early 2016. In more recent times it has rallied as foreign investors purchased Brazilian assets in the hope that the reforms of the current President would improve the economy.

You may like to note that the currency fall took place in spite of the fact that Brazil has interest rates that seem rather extraordinary from our continent of near zero and indeed negative official ones.

the Copom unanimously decided to reduce the Selic rate by one percentage point, to 11.25 percent per year, without bias.

Although as you can see they have been easing policy in 2017.

Equity markets and leverage

These plunged as well and led to a moment which will have Snoopy from the Peanuts cartoons back on the roof of his kennel wailing “When,when,when will I ever learn……?”

The 3x Brazil ETF ends the day down 48.2%, the largest single day decline for an ETF in history. Maravilhoso.  ( @charliebilello ).

Ouch! Although someone did suggest there has been a worse decline.

Not quite. There was a certain Europe listed 5x Swiss Franc ETF that did worse on a certain Jan day in 2015. ( @garobhai)

What was that about sorrows coming in battalions rather than single spies?

An economic depression

I have looked at the economic woes of Brazil before and note the central banker euphemisms of the Central Bank of Brazil.

The economy continues to operate with a high level of economic slack, reflected in the low industrial capacity utilization indices and, mainly, in the unemployment rate.

Yesterday the Brazilian statistics office released its latest unemployment data.

In the 1st quarter of 2017, the compound labor underutilization rate (which aggregates the unemployed persons, time-related underemployed persons and potential workforce) stood at 24.1%, which represents 26.5 million persons. In the 4th quarter 2016, for , this rate was of 22.2% and, in the 1st quarter of 2016, it was 19.3%.

Well played to them in having an underemployment rate rather than an unemployment one. Unfortunately it is not only high it is rising quite sharply and as an aside it reminds us that Brazil has a large population. It is not quite so easy to find the unemployment rate itself but I did finally spot it.

The unemployment rate ( 13.7%) advanced in all Major Regions in the 1st quarter of 2017 in relation to 4th quarter of 2016.

If the double-digit rate of unemployment is to fall then Brazil will need some economic growth but last Friday’s service data showed the reverse.

In March, the services sector recorded decrease of 2.3% in the volume of sales over the previous month (seasonally-adjusted series), after having recorded a growth of 0.4% in February (reviewed) and 0.0% in January (reviewed). This is the highest decrease of the series initiated in 2012….

Compared to a year ago there has in fact been a sharp decline.

In the non-adjusted series, in the comparison with March 2016, the sector posted decrease of 5.0%, following the downward trend of 5.3% in February (reviewed) and 3.5% in January. With such results, the cumulative rate in the year stood at -4.6% and, in 12 months, at -5.0%.

The retail sales sector is not helping either.

In the seasonally-adjusted series, the extended retail trade – which includes retail plus the activities of vehicles, motorcycles, parts and pieces and of construction material – once again registered a negative change in volume of sales over the immediately previous month (-2.0%)…….Compared with March 2016, the extended retail trade retreated 2.7% in volume of sales (34th consecutive negative rate) and -1.2% in nominal revenue.

34 months of declining retail sales is yet another depressionary signal is it not?

What about inflation?

The picture had been improving although the level is high for these times.

The Extended National Consumer Price Index (IPCA) of April recorded a change of 0.14%……..In the last twelve months, the index was down to 4.08%, below the 4.57% result of the previous month, becoming the lower rate in 12 months since July 2007, when it was at 3.74%

The fall was mostly due to something of a shambles on the electricity front although of course Brazil is far from alone in that.

The 6.39% drop in the item electricity represented discounts over bills, as a result of the decision of the Brazilian Electricity Regulatory Agency (Aneel), so as to make up for the overcharge, in 2016, of the so-called Reserve Energy Charge (EER) destined to pay the Angra III power plant.

The price of chocolate went up by 10.23% on an annual basis which is yet another country that does not reflect falls in the price of cocoa.

Comment

So far I have avoided looking at the economic depression in growth or Gross Domestic Product terms so let us now catch up with that.

In 2016, the GDP fell 3.6% in relation to the previous year, slightly lower than the 2015 result, when it had been 3.8%. There were drops in Agriculture (-6.6%), Industry (-3.8%) and Services (-2.7%). The GDP totaled R$ 6,266.9 billion in 2016.

The GPD fell 0.9% in the 4th quarter of 2016 against the 3rd quarter, considering the seasonally adjusted series. It is the eighth consecutive negative result in this kind of comparison. Agriculture grew 1.0%, whereas Industry (-0.7%) and Services (-0.8%) fell.

The only real ripple of good news I can find is that wheat production has been strong in 2017 so far so maybe agriculture will continue to grow. I note that the central bank was not especially optimistic in its April report and neither was the Markit manufacturing survey from earlier this month although it did not expect a further decline.

However, rising from 49.6 in March to 50.1 in April, the latest reading was indicative of broadly unchanged business conditions facing goods producers.

So the political and financial crisis as so often is hitting an economy when it is already down. I also note that when a shock hits even interest-rates of 11.25% do not protect a currency which is a lesson that has been taught many times before. Although for buyers of the Real at current levels there are likely to be fewer interest-rate cuts in 2017 now for obvious reasons. For s start the lower currency if sustained will lead to higher inflation.

As to quality of life even the recent Olympics has been seen to have a dark side. From the Guardian yesterday.

The area where most of our homes once stood is now a large concrete car park that is usually empty and insufferably hot. It is sad. There used to be 650 families here. Today, there are 20……..Hosting was a mistake. When the Games were over, those that already had money and investments – the hotel owners, businessmen, building companies, tourist agents and government officials – were better off, while the country and the people were left with the bill.