Brazil’s Determined Exchange Rate Dump
As GDP growth stalled to 3 percent on poor retail numbers setting the stage for deeper interest rate cuts, Brazilian Finance Minister Mantega shifted the “currency war” to another front with a WTO request to authorize anti-dumping penalties against countries engaged in unfair competitive devaluation including through quantitative easing. The real fell back to 1.8 to the dollar as the threat was tabled as the worst performing emerging market unit, with net debt and equity outflows extending their streak which began with stiffer overseas borrowing and derivatives curbs. In the US, trade unions have long advocated for such sanctions at the multilateral body as results have been unavailing from unilateral reprisal as embodied in Senate legislation imposing tariffs against identified “manipulators.” China briefly allowed the yuan to surge a daily extreme in reaction to the bill as the Treasury Department again postponed its semi-annual report on sensitive exchange rate relationships. The delay came ahead of G-20 and APEC summits, and raised the ire of opponents to replenishing development bank funding calling for a harder line against chronic-deficit trade partners. Brazil itself although reliant on Chinese commodities demand runs an overall current account deficit which has been offset by steady FDI. The central bank, which has seen its reputation eroded from the monetary turnaround under exporter political antagonism, was not in a position to condemn other authorities’ interference as it embarked on a series of spot and swap defenses. The situation may have parallels with 2008, with some companies experiencing dollar-denominated distressed debt spreads, and longer-tenor local instruments foreign-held in a greater proportion than the 12 percent aggregate vulnerable to selloffs which may not re-engage with enduring inflow taxes. In Mexico, in contrast, international participation absorbing 40 percent of term paper stayed relatively firm, despite the peso off 10 percent and Cemex’s corporate offering spiking to a 20 percent yield as it also reportedly breached covenants. Inflation hovers around the 3 percent target and will not noticeably worsen with depreciation according to the central bank, as it pledged to avoid intervention and capital restrictions with the ability to tap a $50 billion IMF contingency line.
Poland is as well equipped with this capacity as it was forced into rare zloty support prior to elections which saw a handy second term victory by the ruling coalition, sparking a rally. International investors’ 30 percent ownership of local bonds exceeds private pension funds where the state has pared its contribution to observe the 55 percent of GDP constitutional debt limit. Prime Minister Tusk declared reinvigoration of his party’s original fiscal reform drive as he too petitioned for relief.
