Brazil vs the global carry trade

By Felix Salmon
November 25, 2009
powerless in the face of the global carry trade:


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Even capital controls, it seems, are powerless in the face of the global carry trade:

Brazil’s real is the “most overvalued” currency as a “wall of money” coming into Latin America’s biggest economy may overwhelm government efforts to curb its rally, said Goldman Sachs…

“After some initial success with capital controls, real appreciation appears to be on the rise again,” Stolper wrote in a note to clients.

The real has gained 34 percent this year, making it the second-best performer in the world after the Seychelles rupee…

A quickening economic recovery and the nation’s link to growing demand for commodities from emerging markets such as China have led to “unprecedented amounts” of overseas capital flowing into the country, Stolper wrote. Inflows reached $17.6 billion in October, compared with $6 billion to $8 billion in previous months, he wrote.

Yes, Brazil has a lot of commodities, but I can assure you that it’s not exporting $17.6 billion of commodities every month. This is hot money, plain and simple, the tool of speculators who fund themselves at near-zero rates in dollars and invest in an appreciating currency paying an interest rate of 8.75% and rising. The influx does no good for Brazil whatsoever (exporters hate overvalued currencies) while feeding huge dividends to hedge funds and others with little long-term stake in Brazil’s future.

The Brazilian central bank is saying that the current capital controls are “adequate”, and that it’s not targeting exchange rates. But it’s surely well aware that this is the kind of story which tends to end in tears. And that there’s not much it can do to stop the carry trade, without endangering the economy in other ways. Brazil’s technocrats have no desire to wall the country off from international trade and capital flows. Suffering this kind of problem is a natural, if unpleasant, consequence of their decision to open the country up.

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