Posted March 08, 2010
The Brazil real increases in value. The increase is linked to that of the euro which flucuated after Greek financial news.
Out of Sao Paulo comes news that the Brazilian real posted a stronger open on Tuesday, at just below BRL 1.80. This marks the first time that the real hit this level since January 21st. Against the US dollar, the real opened at BRL 1.79. It closed the night before at BRL 1.7965. The increase is due in part to the news out of Greece that the country may have a handle on some of its financial difficulties.
On February 1st of this year, the real hit its weakest level at BRL 1.89. The real has been impacted by the Greek financial woes, and now, as the euro zone bounces back slightly, the real is likely to rebound as well. The Greeks announced that the country would have control over its financials.
Experts and investors alike are not confident that the Greek’s announcement of putting better monetary policy in place will in fact hold true. However, if it does, and goes as the Greeks announced it would, this would keep the real below BRL 1.80, an important level monetarily.
Some believe that the significant increase in the real over the US dollar is because investors expect that the country will announce interest rates to rise again soon and are therefore playing the currency off these interest rates. This strategy, called the forest interest rate arbitrage strategy occurs when traders will borrow a currency that has a lower interest rate and use it to purchase currency with a higher interest rate. As such, it is often part of the carry trade. In this particular case, the investors are profiting from the higher interest rate companies such as Brazil and using Japan and the US currency’s lower interest rate to make that profit.
Some investors see interest rates rising significantly in the short term by as much as 25 base points by the end of April. Others see significant rate increases occurring by the end of March. The Brazilian privately owned bank, Itau Unibanco has set the end of March for a rate increase.
However, concerns over inflation are also evident. The Central Bank of Brazil has taken some significant heat in the last months over inflationary concerns. Information out of the bank recently provided some relief on that front since inflation in the state of Sao Paulo rose by 0.74 percent. This comes after a rise of 1.34 percent increase in January. Though inflation is still a concern, there is a temporary reprieve for the Central Bank.
The Central Bank here uses interest rates to help control inflation. Brazil has in place an inflation target at 4.5 percent annually. As of mid February, the 12-month rolling inflation is at 4.59 percent.
Investors warn that the real’s significant increase so quickly may not hold strong for long, especially if the euro zone sees any significant decrease in value. The real tends to pattern after the euro zone. Other debt problems in the euro zone, outside of the Greek debt concerns, may also affect the real in the weeks and months to come.