Brazil has its very own currency war

This week has been one where the political topic of impeachment has affected financial markets. Like so many things these days it started with the Donald but then as the week developed headed south to the sound of samba music. From the BBC.

Brazilian President Michel Temer says he will not quit, amid allegations he authorised paying bribes to silence a witness in a huge corruption scandal……….Opposition parties have been demanding snap elections and his impeachment.

This would add to the impeachment of the previous President Dilma Rousseff in what must now seem something of a conveyor belt to ordinary Brazilians.

The Real

As events unfolded I was reminded of the famous statement from Brazil’s Finance Minister from September 2010.

“We’re in the midst of an international currency war, a general weakening of currency. This threatens us because it takes away our competitiveness,” Mr Mantega said. By publicly asserting the existence of a “currency war”, Mr Mantega has admitted what many policymakers have been saying in private: a rising number of countries see a weaker exchange rate as a way to lift their economies. ( Financial Times)

Back then he was complaining mostly about the US Dollar which had fallen by around 25% against the Brazilian Real as the US Federal Reserve expanded its balance sheet after large interest-rate cuts. Well presumably he would have been happier with what happened yesterday although probably not the cause.

The real tumbled 8 per cent to 3.38 against the US dollar, wiping out all of this year’s gains and taking the currency back to its level of last December. The real had been trading below 3.10 to the dollar as recently as Wednesday.

If we look back we see that Finance Minister Mantega has in more recent years much to cheer if he was a fan of a lower currency. Back in September 2010 when he made his speech some 1.7 Reals purchased a single US Dollar so approximately half the current rate. In fact the Real had been even lower as it had fallen to more than 4 versus the US Dollar in late 2015 and early 2016. In more recent times it has rallied as foreign investors purchased Brazilian assets in the hope that the reforms of the current President would improve the economy.

You may like to note that the currency fall took place in spite of the fact that Brazil has interest rates that seem rather extraordinary from our continent of near zero and indeed negative official ones.

the Copom unanimously decided to reduce the Selic rate by one percentage point, to 11.25 percent per year, without bias.

Although as you can see they have been easing policy in 2017.

Equity markets and leverage

These plunged as well and led to a moment which will have Snoopy from the Peanuts cartoons back on the roof of his kennel wailing “When,when,when will I ever learn……?”

The 3x Brazil ETF ends the day down 48.2%, the largest single day decline for an ETF in history. Maravilhoso.  ( @charliebilello ).

Ouch! Although someone did suggest there has been a worse decline.

Not quite. There was a certain Europe listed 5x Swiss Franc ETF that did worse on a certain Jan day in 2015. ( @garobhai)

What was that about sorrows coming in battalions rather than single spies?

An economic depression

I have looked at the economic woes of Brazil before and note the central banker euphemisms of the Central Bank of Brazil.

The economy continues to operate with a high level of economic slack, reflected in the low industrial capacity utilization indices and, mainly, in the unemployment rate.

Yesterday the Brazilian statistics office released its latest unemployment data.

In the 1st quarter of 2017, the compound labor underutilization rate (which aggregates the unemployed persons, time-related underemployed persons and potential workforce) stood at 24.1%, which represents 26.5 million persons. In the 4th quarter 2016, for , this rate was of 22.2% and, in the 1st quarter of 2016, it was 19.3%.

Well played to them in having an underemployment rate rather than an unemployment one. Unfortunately it is not only high it is rising quite sharply and as an aside it reminds us that Brazil has a large population. It is not quite so easy to find the unemployment rate itself but I did finally spot it.

The unemployment rate ( 13.7%) advanced in all Major Regions in the 1st quarter of 2017 in relation to 4th quarter of 2016.

If the double-digit rate of unemployment is to fall then Brazil will need some economic growth but last Friday’s service data showed the reverse.

In March, the services sector recorded decrease of 2.3% in the volume of sales over the previous month (seasonally-adjusted series), after having recorded a growth of 0.4% in February (reviewed) and 0.0% in January (reviewed). This is the highest decrease of the series initiated in 2012….

Compared to a year ago there has in fact been a sharp decline.

In the non-adjusted series, in the comparison with March 2016, the sector posted decrease of 5.0%, following the downward trend of 5.3% in February (reviewed) and 3.5% in January. With such results, the cumulative rate in the year stood at -4.6% and, in 12 months, at -5.0%.

The retail sales sector is not helping either.

In the seasonally-adjusted series, the extended retail trade – which includes retail plus the activities of vehicles, motorcycles, parts and pieces and of construction material – once again registered a negative change in volume of sales over the immediately previous month (-2.0%)…….Compared with March 2016, the extended retail trade retreated 2.7% in volume of sales (34th consecutive negative rate) and -1.2% in nominal revenue.

34 months of declining retail sales is yet another depressionary signal is it not?

What about inflation?

The picture had been improving although the level is high for these times.

The Extended National Consumer Price Index (IPCA) of April recorded a change of 0.14%……..In the last twelve months, the index was down to 4.08%, below the 4.57% result of the previous month, becoming the lower rate in 12 months since July 2007, when it was at 3.74%

The fall was mostly due to something of a shambles on the electricity front although of course Brazil is far from alone in that.

The 6.39% drop in the item electricity represented discounts over bills, as a result of the decision of the Brazilian Electricity Regulatory Agency (Aneel), so as to make up for the overcharge, in 2016, of the so-called Reserve Energy Charge (EER) destined to pay the Angra III power plant.

The price of chocolate went up by 10.23% on an annual basis which is yet another country that does not reflect falls in the price of cocoa.


So far I have avoided looking at the economic depression in growth or Gross Domestic Product terms so let us now catch up with that.

In 2016, the GDP fell 3.6% in relation to the previous year, slightly lower than the 2015 result, when it had been 3.8%. There were drops in Agriculture (-6.6%), Industry (-3.8%) and Services (-2.7%). The GDP totaled R$ 6,266.9 billion in 2016.

The GPD fell 0.9% in the 4th quarter of 2016 against the 3rd quarter, considering the seasonally adjusted series. It is the eighth consecutive negative result in this kind of comparison. Agriculture grew 1.0%, whereas Industry (-0.7%) and Services (-0.8%) fell.

The only real ripple of good news I can find is that wheat production has been strong in 2017 so far so maybe agriculture will continue to grow. I note that the central bank was not especially optimistic in its April report and neither was the Markit manufacturing survey from earlier this month although it did not expect a further decline.

However, rising from 49.6 in March to 50.1 in April, the latest reading was indicative of broadly unchanged business conditions facing goods producers.

So the political and financial crisis as so often is hitting an economy when it is already down. I also note that when a shock hits even interest-rates of 11.25% do not protect a currency which is a lesson that has been taught many times before. Although for buyers of the Real at current levels there are likely to be fewer interest-rate cuts in 2017 now for obvious reasons. For s start the lower currency if sustained will lead to higher inflation.

As to quality of life even the recent Olympics has been seen to have a dark side. From the Guardian yesterday.

The area where most of our homes once stood is now a large concrete car park that is usually empty and insufferably hot. It is sad. There used to be 650 families here. Today, there are 20……..Hosting was a mistake. When the Games were over, those that already had money and investments – the hotel owners, businessmen, building companies, tourist agents and government officials – were better off, while the country and the people were left with the bill.


Brazil has hopes for an economic recovery but it has little to do with Rio2016

The biggest show on Earth otherwise known as the Olympics is now in full flow in Brazil. Indeed there is a golden tinge now from a UK perspective after Adam Peaty broke the world 100 metres breaststroke record twice so congratulations to him. However more of a metaphor for the economic situation came from the two Olympic road races which were admittedly exciting but also very dangerous on the descent part. Of the four leaders at that point in the two races only one remained on her bike and the fall of Annemiek van Vleuten was sickening. I am pleased to hear she is recovering but concussion is an odd business so we cannot yet be sure, but we do know that cycling seemed to have elements of the film Rollerball for a while.

The economic situation

The IMF produced its review of Latin America in April and told us this.

Economic activity contracted by 3.8 percent in 2015 and is projected to decline again in 2016 at the same rate

Not exactly auspicious to hold an Olympics during what is clearly a recession and looking backwards may yet be defined as depression. What is the outlook?

sequential growth is projected to turn positive during 2017; nevertheless, output on average will likely remain unchanged from the previous year.

As to the list of causes of this situation it appears to be rather long.

Economic activity has been contracting because of low business and consumer confidence, high domestic policy uncertainty, weakening export prices, tightening financial conditions, and low competitiveness.


There has been a succession of these as the ratings agencies try as ever to catch up with reality. The Financial Times pointed out this in June.

Many blame Ms Rousseff’s government, which through the granting of ad hoc tax breaks and intervention in the economy sharply increased gross public debt to 67.5 per cent of GDP from just over 52 per cent in mid-2014.

In terms of the Euro area crisis these are by no means large numbers although of course it does exceed the levels of the Stability and Growth Pact but everyone ignored those! However I note that the latest Fitch downgrade from May shows a continued rise in the expected level of government debt.

Fitch forecasts the general government deficit to average over 8% of GDP in 2016-17, down from over 10% in 2015. On current policy settings, Fitch forecasts that Brazil will continue to incur primary deficits during 2016-17. The general government debt burden is expected to reach nearly 80% of GDP by 2017 (making Brazil one of the most indebted sovereigns in the ‘BB’ category) and remain on a rising trend unless growth recovers more materially and fiscal consolidation gains pace.

One factor that is very different to what has become considered to be a modern normal is the price Brazil has to pay to borrow. The ten-year Brazilian government bond yield is at 11.75% so we do see at least one country which the much maligned bond vigilantes have been at play! More seriously we see that debt costs seem set to be an increasing problem for Brazil as it borrows more. The world-wide move to lower bond yields has not passed Brazil by just merely that it started at a very high level of over 16% at the turn of the year.

Foreign investors will have had a good 2016 as not only have bond prices risen but the Brazilian Real has too from above 4 to the US Dollar to 3.16 now.

Interest-Rates and Inflation

With an economy in a severe recession then modern central banking theory would presumably have the official interest-rate in negative territory. Not the Banco Central De Brasil.

Therefore, the Copom unanimously decided to maintain the Selic rate at 14.25% p.a., without bias.

The reason that it has such a high interest-rate is the problem Brazil is experiencing with inflation.

For regulated prices, the Committee forecasts an increase of 6.6% in 2016, 0.2 p.p. lower than the forecast in the June Copom meeting. For 2017, the current forecast of a 5.3% increase in regulated prices is 0.3 p.p. higher than the forecast in the last Copom meeting.

Thus we see a central bank which is pretty much a pure inflation targeter and unfashionably for these times is pretty much ignoring the ongoing recession. The inflation target is higher than we are used to at 4.5% which provokes a wry smile as do not places like the IMF and many economists tell us that higher inflation is a form of economic nirvana?

The central bank also gives us a clear guide to how severe the fiscal problem in Brazil is.

The nominal result, which includes the primary result and nominal interests appropriated on an accrual basis, posted a deficit of R$32.2 billion in June. In the year, the nominal deficit totaled R$197.1 billion, compared with a deficit of R$209.6 billion in the same period of the previous year. In the 12-month period up to June, the nominal result posted a deficit of R$600.5 billion (9.96% of GDP), falling by 0.12 p.p. of GDP when compared with the May’s result.


Sadly this is soaring in response to the recession.

The unemployed population (11.6 million persons) rose 4.5% in relation to the quarter between January and March (11.1 million persons), a rise of 497 thousand persons looking for a job. Compared with the same quarter last year, this estimate increased 38.7%, a rise of 3.2 million unemployed persons in the workforce.

The unemployment rate has risen to 11.3% which is up 0.4% on the previously quarter and a chilling 3% compared to a year before.

In terms of an economy we have learnt that it is also important to look at employment trends as well.

The employed population (90.8 million persons) remained stable when compared with the quarter of January to March 2016. In comparison to the same quarter 2015, when the total employed persons was 92.2 million people, there was decrease of 1.5%, a reduction of 1.4 million persons among the employed.

The employment numbers may be suggesting an end to the current economic decline but the picture for real wages is grim.

The average usual real earnings from all jobs (R$ 1,972) fell 1.5% over the same quarter from January to March of 2016 (R$ 2,002) and had a drop of 4.2% in relation to the same quarter of the previous year (R$ 2,058).

Misery Index

It used to be fashionable to calculate a Misery Index which involved adding the inflation rate to the unemployment rate. Perhaps it got redacted as we began to be told that inflation is good for us. Anyway in Brazil the index is of the order of a thoroughly miserable 17%.

Will the Olympics help much?

Apparently not according to Fitch via Forbes.

Total Olympics infrastructure investment between 2009-2015 reached around R$38.5 billion ($12 billion), a small sum compared to the country’s $2.2 trillion economy. Tourism is expected to generate R$1.3 billion ($400 million) and increase real growth by just 0.02 percentage points – less than half amount originally estimated.


There is much to consider here and if we look for some perspective we see a period where Brazil rode the commodity price boom by exporting in essence to China. This was the era described by the then Finance Minister as the “Currency Wars” as the Real rose in response. This meant that Brazil had a type of Dutch Disease as other production such as manufacturing slowed. Whilst it had successes it is always worrying to see economic systems described as a model as that of President Lula was. There only way is invariably not up after that.

So bust followed and inflation accompanied it as the Real fell. Now we see unemployment rising strongly too. The immediate outlook is not good according to the latest business surveys.

Consequently, the seasonally adjusted Markit Brazil Composite Output Index climbed from 42.3 in June to 46.4 in July, its highest mark since March 2015.

However the decline appears to be slowing and let us hope that such a situation continues. There are plenty of challenges for the new government which includes all the ongoing corruption scandals that have so plagued modern-day Brazil. There is an irony though in that the turn coincides with the Olympics rather than being caused by it. At least there is now some hope that the decline will slow and then stop.

Number Crunching

Brexit seems to have had very little impact on UK football transfers from Europe as opposed to the “devastating consequences” promised by Karen Brady to the BBC. However there is one clear consequence so far.

Pogba fee is €105 million. That’s £89 million. Would’ve been £74 million had he been bought before the pound crashed ( @andymitten)

At that exchange rate he was previously sold by Manchester United for just over 1 million Euros so storming business for Juventus. Oh and of course it assumes no exchange-rate hedging.

The US interest-rate rise conundrum continues

It was only yesterday that I analysed the risk that the European Central Bank eases monetary policy again. In essence it boils down to the level of the Euro with a soupcon of oil price influence. But there is quite a list of central banks considering easing policy further to join the 60 or so moves we have seen so far in 2015. However the major central bank which is the US Federal Reserve wants us to believe that it will raise interest-rates under its policy of Forward Guidance and wants us to forget the couple of false starts on that front that 2015 has already seen!

Over the past week or so we have had a veritable smorgasboard of views from Federal Reserve voting members from a definite yes (Esther George) to a hint of further easing and hence no (Kochlerkota). The majority view is this from Vice-ChairMAN Stanley Fischer in his speech at Jackson Hole.

With inflation low, we can probably remove accommodation at a gradual pace. Yet, because monetary policy influences real activity with a substantial lag, we should not wait until inflation is back to 2 percent to begin tightening.

The tenet of his speech is that inflation is on the way back to 2% with the implied view that interest-rates need to rise soon in response. That is what we are supposed to think.

Currency Wars

I note that Mr.Fischer also steers us towards this in his speech.

The rise in the dollar since last summer, of about 17 percent in nominal terms, with its associated declines in non-oil import prices, could plausibly be holding down core inflation quite noticeably this year.

This is a monetary tightening although with the US Dollar being the reserve currency with the majority of commodities priced in it there is a smaller influence than say the UK. I note he also points us to an economic model which suggests the impact will not last long.

Finally, PCE inflation shows a sizeable but transient drop due to declining import prices.

The United States is traditionally not that concerned about the impact of its monetary policy on others but the flip side of the appreciation discussed has been seen just this morning. From Darlington Dick.


The so-called emerging market currencies are getting what the Duke of Wellington called a “damned hard pounding” and if we return to the originators of the Currency Wars theme then even an Olympics and a football World Cup are being cast aside. From Bloomberg.

Brazil’s real led losses among major currencies and fell to a new 12-year low……..The currency declined for a fourth straight day, falling 1.7 percent to 3.7611 per dollar, the weakest level since 2002.

Poor Brazil has been alternately frozen (the original Currency Wars complaint) and then heated up by the changes in perceived US monetary policy, like a football really.

The International Monetary Fund

This seems to get ever more concerned about a rise in US interest-rates as its latest statement makes clear.

Advanced economies should maintain supportive policies. In most advanced economies substantial output gaps and below-target inflation suggest that the monetary stance must stay accommodative.

Does it mean the US? Well the specific section carries on the theme.

In the United States, growth in the first half of the year was 1.8 percent, compared to 3.8 percent in the 2nd half of 2014. The growth slowdown reflected harsh winter weather, port closures, and a strong downsizing of capital expenditure in the oil sector in Q1, and relatively sluggish business investment in Q2. Recent revisions in the U.S. national accounts suggest that productivity growth during 2012-14 was lower than previously thought.

What about going forwards?

Longer-term growth prospects are weaker, reflecting an aging population and low total factor productivity growth.

Indeed the IMF goes so far as to drop quite a hint.

with little evidence of meaningful wage and price pressures so far,

It also mimics the “Warning,Warning” of the robot Robbie in the Swiss Family Robinson films.

Risks are tilted to the downside, and a simultaneous realization of some of these risks would imply a much weaker outlook.

There is also a hint as it turns out in the location of the G-20 meeting which is Ankara where US delegates will find that there US Dollar expenses will go much further than they did.

The Beige Book

This is where the various regional Federal Reserves take a look at the economy in their area and the latest version was released last night. So what do we learn?

Six Districts cited moderate growth while New York, Philadelphia, Atlanta, Kansas City, and Dallas reported modest increases in activity. The Cleveland District noted only slight growth since the last report. In most cases, these recent results represented a continuation of the overall pace reported in the July Beige Book.

So good news but hardly signs of a boom and whilst some see it in the labour market section I am less convinced.

Most Districts reported modest to moderate growth in labor demand, although Boston, Cleveland, and Dallas cited only slight increases in hiring. This tightening of labor markets was said to be pushing wages up slightly in selected industries or occupations, especially in the New York, Cleveland, St. Louis, and San Francisco Districts.

If there is a boom this is in a familiar area.

Reports on residential and commercial real estate markets across the Districts were mostly positive. Existing home sales and residential leasing widely improved, with home prices moving up in most areas.

This backs up a theme from the CoreLogic numbers released yesterday as well.

On a month-over-month basis, home prices increased by 1.7 percent in July compared to June data…..Home prices, including distressed sales, increased 6.9 percent in July 2015 compared to July 2014. June marks the 41st consecutive month of year-over-year home price gains.

A central bank rasing interest-rates to slow house price growth? I will believe that when I see it! After all they are presented as wealth gains and not inflation in modern central banking theory. Also on a technical note the US uses rents and not prices in its CPI (Consumer inflation) measure. It is one of the factors holding it up with primary rents rising at just under 3.6% and maybe set for a rise.


Tomorrow sees the US employment and non-farm payrolls report for August. Regularly we see moves which are statistically insignificant considered as policy moving events! In case you were wondering the Bureau of Labor Statistics estimates that for July the statistically significant change was 107,400. Rather gives a perspective to a 10k or 20k difference to expectations doesn’t it? That is before the fact that the two different surveys often give conflicting answers.

However the US Federal Reserve persists with the mantra that an interest-rate rise is on its way. In itself a 0.25% increase is not much of a change but that ignores how tightly wired the world financial system and economy remains. So the song for September 17th is from Daniel Bedingfield.

If only I could get through this
If only I could get through this
If only I could get through this
God, God gotta help me get through this

Perhaps the Federal Reserve could play it as background music. although surely they must fear what might happen if they raise and therefore will delay yet again. If so perhaps the song should be from Green Day.

Summer has come and passed
The innocent can never last
Wake me up when September ends