An overly strong local currency has been a structural problem
for Brazil -- except, of course, when the real has been too weak
for the government's comfort. It looks like the situation is
getting ready to reverse
From the start of the year to last week, the real surged 8.6%
against the dollar, returning to roughly the level the Brazilian
traded at in late October
While the real has since given up 2.5% so far in March, it is
largely because traders are buzzing that the most recent swing to
the upside has gotten the Brazilian government ready to once
again raise the currency walls and shut out foreign money.
This time around, the measures on the table include calling in
short-term credit lines early, sucking that liquidity out of the
market -- and out of foreign traders' clutches.
They are also reportedly looking into cutting off lending from
foreign companies into Brazilian subsidiaries in order to turn
off that particular spigot through which cash can enter the
The underlying problem is that while Brazilian interest rates
have declined significantly in the last year, they are still well
above what lenders can hope to receive in North America, Europe
or Japan. This has made the country a haven for global capital,
driving up demand for reais and so pushing the local currency's
relative value upward.
While many countries encourage strong currency policies,
Brazil and other export-driven economies have suffered when their
currencies get too strong.
strong real last year
sapped the profits of exporters like Vale (VALE, quote) and made
local manufacturers like Gerdau (
) and even Petrobras (
) less competitive on a global scale -- and that in turn dragged
on the Brazilian stock market (
As this develops, look to see the WisdomTree ETF that tracks
the Brazilian real (
) in play.