Brazil, Mexico try to stem currency declines

Brazil and Mexico finally intervened in the FX markets in an attempt to support their currencies, which have been battered by capital outflows. The risk with this sudden depreciation is inflation, something that Latin American nations have plenty of experience with.

Bloomberg: - Brazil’s real had the biggest gain in seven months and Mexico’s peso pared losses after policy makers in both countries propped up their currencies amid a selloff in emerging-market assets.

The real rose 2.8 percent to 2.0326 per U.S. dollar at the close in Sao Paulo after the central bank sold currency swap contracts at an auction for the third time in the past week. The peso fell 0.6 percent to 13.9887 per U.S. dollar, paring losses of as much as 1.2 percent after the monetary authority sold $258 million at an auction.

The real has suffered from an “aversion to risk” as it plunged 6.1 percent this month, said Carlos Hamilton, the Brazilian central bank’s director of economic policy. What concerns policy makers is excess volatility, not any particular exchange rate, Hamilton said at an event in Curitiba.

USD-BRL (Brazil real)

Here is a comment from Goldman on the topic:

GS: - In our assessment, at this stage a BRL above 2.10 generates some discomfort among the authorities as it could impact the inflation dynamics. We are of the view that rather than trying to enforce a ceiling the central bank is trying to anchor the BRL which has been weakening faster than other regional currencies. Were the external backdrop to deteriorate further and other regional commodity currencies come under pressure, the central bank may validate additional moderate and orderly BRL depreciation.

As flight of capital out of these nations continues, this will become an ongoing battle. In the long run weaker currencies will help these nations become more competitive - as long as they are able to tame inflationary pressures.

SoberLook.com

Contagion hits Latin America

Contagion comes in many forms. As developed economies faced slower growth, the natural movement of capital was toward emerging economies, where growth is expected to remain robust. But the crisis in Europe is spreading, leaving very few markets unscathed. China is facing a slowdown (more on that later). Capital is starting to flow out of resource rich nations of Latin America. The current view now is that these nations will be facing a slowdown. Brazil is now fully expected to lower rates.

Reuters: All of 32 analysts polled by Reuters expect Brazil's central bank to cut its benchmark interest rate by 50 basis points to 11 percent next week.";

"Today's fall (in the real) may also be driven by an increase in bets on rate cuts in Brazil," Shearing added.

Lower benchmark interest rates can sap some demand for emerging market assets. Brazilian policy-makers expect the local economy to be hit by the deepening crisis in Europe and slower growth in China, Brazil's top trading partner.

Indeed the first sign of capital outflows is the move in foreign exchange levels. The real is approaching new recent lows.  The last time these levels were reached was back in the "dark days" of Sep-2011, when the "double dip" recession in the US was thought to be a certainty.

BRL (Bloomberg)

Mexico is feeling the outflows as well.  The peso is now at levels not seen since 2009.

 MXN (Bloomberg)

For those who remember 1997-98, will recollect just how rapid and violent contagion can become. Many emerging market nations' economies are healthier than ever to withstand a global recession (should one take place), but nevertheless these currency indicators need to be monitored for signs of increased risks.

SoberLook.com