Brazil Drives Down the Real

09/24/2010 5:10 pm EST


Jim Jubak

Founder and Editor,

Japan isn’t the only country to intervene in the markets in an attempt to drive down the price of its currency.

Brazil’s central bank has moved to buy dollars and sell the Brazilian real repeatedly in the last week. Until it fell on September 20th and 21st, Brazil’s currency had been up 34% since the beginning of 2009. That appreciation has played havoc with the country’s exports. The country’s current account deficit is forecast to hit $50 billion by the end of 2010 from $24 billion in 2009.

Brazil’s central bank bought dollars and sold real at a pace of about $1 billion a day last week. And on September 21st, the Brazilian government announced that the country’s sovereign wealth fund had been authorized to buy dollars and other foreign currencies without limit.

All that seems to have had some effect: On September 20th and 21st, the real retreated 0.7% against the dollar.

The government hopes that these measures won’t have to continue indefinitely. Investors moved dollars and other foreign currencies in bulk into Brazil in preparation for the $81-billion Petrobras (NYSE: PBR) stock offering on September 23rd. Investors buying in Brazil—which meant paying with the real—received priority over overseas buyers.

I think that the government is going to be disappointed. There is a wave of smaller offerings in line behind Petrobras as Brazilian companies seek to tap the capital markets at what are, in Brazilian terms, historically low rates.

Given the popularity of Brazilian financial assets with overseas investors, that will result in continued buying of the real and selling of other currencies as money continues to flow into Brazil. (The huge Petrobras offering sold at a much less than expected 2% discount to the market price of shares before the offering. Now, that’s demand! For more on the effect of that offering on Brazil’s financial markets, see my post)

      A survey by the central bank showed that most economists don’t expect the real to weaken until the end of 2011 and then by just 3% from today’s levels.

So, if you’re buying real-denominated assets, it doesn’t look like you need to worry about the currency’s falling value any time soon.

Full disclosure: I don’t own shares of any company mentioned in this post in my personal portfolio.

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