Brazilian economy, one of the BRIC majors and the biggest economy in South America, has been suffering from severe structural problems including slowing growth, rising inflation (6.27%in July 2013) and widespread socio-political issues for quite sometime.
While these alone pose tremendous concern, the real pain has cropped up in the country’s currency market. The performance of the Brazilian currency – Real – has been downright painful for quite some time (read:Short Brazil with These Inverse ETFs).
Inside the Real Weakness
The real already saw its biggest drop against the dollar in more than four years in early July and is now approaching its five-year low against the dollar. Quite expectedly, Brazilian real can now be be called the emerging markets’ worst performing currencies against the U.S. dollar depreciating more than 17% in the first half of the year.
According to Reuters, the latest reason for the plunge in emerging market currencies is the possible tapering of the Fed’s bond buying program which has led to the strengthening of the US dollar, and caused a spike in U.S. debt yields, thereby pushing up borrowing costs globally. Emerging markets have to depend on cheap capital to finance their huge current account shortfall. Consequently, these markets were hurt by the reversal in capital flows, resulting in shap decline in their currencies and stock markets.
As per tradingeconomics, Brazil recorded a trade deficit of $3,953 million in June 2013 while it recorded the worst deficit level (between 1980 and so far in 2013) only a few months ago – in January this year. In such an import-centric scenario, an extremely weak currency is sure to take a toll. Given its large current-account deficit, Brazil now needs to magnetize sizeable inflows just to keep the real alive.
Central Bank Intervention
Continued fall in the real will make imports costlier and in turn aggravate the country’s inflation. On August 22, Brazilian central bank intervened in the currency market to provide $60 billion worth of cash and insurance by the year end to spark the real’s prospect and augment liquidity. The measure is intended to serve triple targets of taming inflation, arresting the real from further slide and setting growth in motion. This currency intervention is likely to widen Brazil’s $45 billion strategy adopted earlier in 2013.
Brazilian Central bank has raised the Selic rate thrice so far this year to curb inflation as well as strengthen currency, but this in turn was hurting the country’s growth profile. Brazil recorded 0.9% GDP growth last year, after registering 2.7% growth in 2011 and 7.5% in 2010.
Following the announcement, the real registered its biggest gain in almost two years, advancing 3.7% to 2.3488 per dollar (on August 23) and suggesting that the problem might take a breather in the near term.
WisdomTree Brazilian Real Fund (BZF) The only fund designed to deliver returns corresponding to the money market rates in Brazil and appreciation of the Brazilian Real relative to USD, plunged about 9.7% on August 23, but gained about 3.28% after the Central Bank’s intervention. This fund provides exposure to the movements of the Brazilian real against the U.S. dollar.(...)Click here to continue reading the original ETFDailyNews.com article: Inside The Weakness Of The Brazil ETFYou are viewing an abbreviated republication of ETF Daily News content. You can find full ETF Daily News articles on (www.etfdailynews.com)
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