Nobody knows what is going on with the currency in Brazil.
After months of targeting a weaker real, the Brazil Central Bank
may be changing course, and they may have to.
All of this is leaving investors with a little Brazil whiplash,
as this market remains the biggest disappointment in emerging
market equity land after two years of underperformance.
Today's local newspapers are saying the Brazil Central Bank
(BCB) will use real appreciation to tame inflation; yet if you
listen to President Dilma Rousseff yesterday she said "...we have
macro conditions to still reducing interest rates".
Well what is it -- are you lowering rates and putting more
downward pressure on the currency, or are you letting the
currency appreciate in order to stem inflationary pressures that
Maybe its politics but the government keeps endorsing
incentives for consumption and investments.
Meanwhile reducing the SELIC rate (Special Clearance and
Escrow System) runs in the opposite direction of the BCB's
interest in using the currency to fight inflation.
For now Rousseff looks to keep spending to stimulate, and
there is political motivation to do so. Brazil's consumers will
keep spending but be wary -- there may be slower consumption
ahead. The consumer space has been the only safe place to invest
in Brazil for two years, and this may be changing.