Brazilian Real Breaks Through $2 U.S.; Control Measures Considered

By Claudio Freitas

As we expected, yesterday the Brazilian real went through the psychological barrier of BRL/US$ 2.00 without major problems. The continued acquisitions of dollars by the Brazilian Central Bank were not strong enough to prevent the appreciation of the Brazilian currency.

However, now there are some talks about some other stronger "heterodox measures" to prevent a continued appreciation of the real. Among all the measures that the newspapers report as being under consideration, we can divide them as follows.

Measures that we completely rule out:

• The establishment of a floor for the currency or any kind of trading range that, when reached, would prompt an aggressive intervention of the Brazilian Central Bank.
• Taxation on short-term capital for investments in the Brazilian stock market.

Measures unlikely but possible:

• The establishment of minimum period for short-term investments in both the equity market and fixed income instruments.
• The establishment of some kind of grace period for short-term investments, where the money would stay on hold, waiting in a line to acquire local assets.

Measures very likely to be implemented:

• Heavy taxation on short-term investments in fixed income.

We do not believe heterodox measures will be strong enough to change the trend in the Brazilian real. Even worse, such measures would raise concerns on the willingness of the Brazilian Central Bank to keep on reducing aggressively domestic interest rates.

We continue to believe that the short-term trend in Brazil remains unchanged, interest rates down and currency up. We continue to favor stocks focused in the local market like Vivo (VIV) and AmBev (ABV), Cemig (CIG) and Copel (ELP) and Brazilian companies that are exposed to local market and also benefit from the appreciation of the currency like TAM (TAM) and Sabesp (SBS).

Comments

[doubleguns:]

The dollar is first in the currency race to the rocky bottom and every other currency is trying to get in the race.

I don't get it.

Jun 03 05:48 PM

[yellowhoard:]

What a nice problem to have.

I suspect they will embark on useful public works projects, dams, water purification, airports, ect...

Jun 03 06:00 PM