Monday, May 28, 2012

What do emerging markets want - propping up currencies after the fall

Brazil has been one of the biggest currency mercantilists. It has clearly tried to force their currency lower in order to make their exports cheaper. It have jaw-boned the markets with rhetoric concerning their currency being too high. Brazil has made it clear that there is a "currency war" and the policies for lowering the dollar is not something they would like to see. 

Brazil has followed aggressive policies to have money not flow into the real. Capital controls, taxes, and financial rhetoric have all been used. These polices have been generally effective, but the latest round of risk-off trading has caused a rout in the real. Much of this sell-off in Brazil is related to forecasts of slower growth. The shine in BRIC's has fallen with commodity prices.This is not what Brazil wants. It wants to be wanted and is now angered that investors want to sell the real.

So now the currency move has gone too far and the central bank has started to use swaps auctions to raise the value of the real. The central bank bought $7.2 billion last month and has been active again in the swaps market. Mexico has followed a similar policy and has sold dollars the first time since 2009.

You may get what you wish but the effects of a weak currency can also be a negative. What central bankers want is control and that is often the most difficult policy goal to achieve. 

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