Brazil and Indonesia have moved to stem the declines in their currencies and shore up confidence at the end of a torrid week for emerging markets where local borrowing costs hit a two-year high.Brazil's Currency War
The central bank of Latin America’s largest economy said late on Thursday that it would launch a currency intervention programme worth about $60bn to ensure liquidity and reduce volatility in the nation’s foreign exchange market.
On Friday, Indonesia’s chief economic minister Hatta Rajasa told reporters that the government would increase import taxes on luxury cars, introduce tax incentives for companies investing in agriculture and metals industries and aim to reduce oil imports.
Brazil’s huge programme, which will be conducted through currency swap and repurchase agreements, follows a more than 15 per cent depreciation in the real against the dollar this year to its weakest levels in more than four years.
Brazil’s central bank said in its statement that it would on Monday to Thursday offer $500m a day in currency swaps to support the real, while on Fridays it would sell $1bn on the spot market through repurchase agreements.
“If judged appropriate, the central bank will take additional measures,” the bank said in the statement. The programme, which will last until December, follows intervention this year by the bank through derivative markets and other means worth about $45bn.
These moves by Brazil are rather amusing since Brazil launched a "currency war" while complaining bitterly over the past two years that its currency was too strong.
Flashback March 3, 2012: Brazil Declares New Currency War on US and Europe; Japan Losing Balance of Trade Battle
Brazil has declared a fresh “currency war” on the US and Europe, extending a tax on foreign borrowings and threatening further capital controls in an effort to protect the country’s struggling manufacturers.Be Careful of What You Ask
Guido Mantega, the finance minister who was the first to use the controversial term in 2010, said the government would not “sit by passively” as developed nations continue to pursue expansionary monetary policies at the expense of Brazil.
“When the real appreciates, it reduces our competitiveness. Exports are more expensive, imports are cheaper and it creates unfair competition for businesses in Brazil,” he said on Thursday after announcing changes to the so-called IOF tax.
Countries need to be careful of what they ask as they just might get it. Brazil got what it asked and now does not want it.
OK Guido, what happened to the increased competitiveness you thought you were going to get?
Brazil's currency madness should provide a lesson for Japan, but it won't.
Mike "Mish" Shedlock