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Tombini takes a “velvet glove” approach

|Includes:VanEck Vectors Brazil Small-Cap ETF (BRF)

Despite anticipation that new Brazilian central bank chief Alexandre Tombini would shake things up at today’s short-notice press conference, the real news stole his thunder.

By the time Tombini got to the podium at noon today, all the wires could find to print was a short notice that Brazil under his monetary direction will remain “open to foreign capital.”

It was an unexpectedly cooperative note to strike when traders were expecting Brazil’s newly minted top government banker — an appointment of incoming president Dilma Rousseff — to unleash some thunder and maybe even a little lightning on the currency markets.

However, while Tombini seems to be playing the “velvet glove” as Brasilia struggles to get the high-flying real back down to a comfort level, finance minister Guido Mantega was tightening the iron fist.

Mantega has emerged as the hawk in Dilma’s administration, having vowed previously that the government could tap unlimited resources to keep the real from getting any stronger.

Today, he announced that financial institutions who want to go more than $3 billion short on the dollar will need to keep 60% of the value of their positions in reserve — a move designed to discourage what has become a big business of betting against the greenback in Brazil.

As of now, Brazilian banks are a net $16.7 billion short on the dollar. By April 4, when the new rule goes into effect, local analysts expect about 40% of that net short position to unwind. As it happens, that would only free up enough cash to cover the new reserve requirement, so it remains to be seen how effective the move will be.

Obviously, a policy like this aims to strengthen the dollar’s relative appeal for Brazilian institutions and so help sap a bit of demand out of the otherwise too-strong real, and by extension, funds like BRF

In practice, it also resolves questions about whether banks that have been playing too hard in the currency markets are risking another implosion.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Stocks: BRF