Brazil’s Rousseff was asking for real’s selloff

By Rob Cox
September 23, 2011

By Rob Cox
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

SAO PAULO – Dilma Rousseff, Brazil’s president, is getting the first market beating of her tenure. Adventurous monetary policy, worries of weakening central bank independence, disco-era industrial policy and even scuttlebutt about insider trading have conspired to hammer the real by 17 percent against the U.S. dollar this month, making it the biggest loser among significant emerging market currencies. Some weakness in the currency was desirable, but as Rousseff may soon learn, it’s tough to regain lost credibility.

The primary catalyst for the currency slide was the central bank’s head-scratching decision on Aug. 31 to reduce its benchmark interest rate by 50 basis points to 12 percent. Not only was the cut not telegraphed by central bank boss Alexandre Tombini, its merits aren’t obvious.

Inflation was 7.2 percent in the 12 months through August, above the Brazilian central bank’s own target ceiling of 6.5 percent. Credit growth is robust, even verging on bubble territory. Finally, the labor market remains tight, with unemployment at a historically low 6 percent last month. And that’s before the last-minute scramble as the 2014 soccer World Cup approaches.

The central bank’s rationale, that the cloudy economic picture abroad will weaken future demand, smacks of a directional hunch. That might be fine for a hedge fund, but it’s adventurous for a central bank.

The rate cut should also reduce cross-border speculation by making Brazilian assets less attractive, thereby weakening the currency. That helps domestic manufacturers and exporters. But while this aspect might be a concern for the government, for the central bank it should come second to fighting inflation. So investors have interpreted the move as evidence of a worrying chink in the central bank’s independence.

And that’s not all. Sao Paulo’s financial circles have been buzzing with talk that a select few made billions betting on a rate cut, even though it doesn’t seem that any economists predicted one from their study of publicly available information.

Many emerging market currencies are taking a hit as investors flee risky investments. But add in inexplicable monetary policy that hews a little too closely to political whim, and a whiff — even if no evidence — of corruption, and it’s no wonder Brazil’s real is taking the most punishment.


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a BRL selloff is exactly what the doctor ordered. Mindless adherence to inflation targeting is what got the Eurozone where it is today. Thank God someone is willing to question this insane orthodoxy.

Posted by johnhhaskell | Report as abusive

Putting the onus on Dilma only detracts from more credible opinion voiced here. The economic team Dilma affectionately calls “os tres porcinos” (the three little pigs)coordinate policy and Mr Cox and his sources in Sampa financial circles probably know who they are.

Taking pressure off the real was an issue two years ago as much as it is today and has as much to do with the machinations of free marketeers, the carry trade and other speculators in New York, London and Hong Kong as it does with Brasilia providing a pathway to the middle class for millions on the bubble.

Corruption is in the eye of the beholder and a convenient ruse for what Cox posits regarding insiders. Leading Brazilian and Mexican names lost around $10 billion in the latest Wall Street slide, and they hardly lack inside information anywhere. Moreover, US dollars and yuan held by China finding their way into the real zone because Beijing is Brazil’s top trade partner suggest that part of the real’s movement represents a de-facto devaluation of that paper money too.

Brazil’s real adventure is that it has sided with China and France calling for a new reserve currency unit, in spite of the current global malaise. Perhaps this is why the Brazil bashing and Dilma bashing here.

Posted by Globleizer | Report as abusive