Brazil and its exchange-traded fund (EWZ) have come a long way. From a run on its currency and dwindling foreign exchange reserves to an appreciating currency and the formation of a soveriegn wealth fund. However, like everything political in Brazil, even this good news does not come without controversy.
Jonathan Wheatley in São Paulo reports for the FT that the original plan had the SWF drawing on Brazil’s foreign reserves, which have risen quickly this year to about $180bn. That plan sparked a behind-the-scenes row between the finance ministry and the central bank and the government’s commitment to Brazil’s floating exchange rate regime.
“The big victory for the central bank,” a central bank official said, “is that the fund will have nothing to do with Brazil’s foreign reserves and nothing to do with the central bank.” But in an interview with the FT in Brasília last week, Brazil's Finance Minister Mr. Mantega said the fund would indeed affect the accumulation of reserves and would share the central bank’s source of funding at the national treasury.
Under current rules intervention in currency markets is the sole prerogative of Brazil’s central bank. It is unlikely that Brazil's current $180 billion of foreign exchange reserves would be used wisely to increase demand for dollar assets.