Regional Currency Investment Perspective on Latin America
interest rate differential with the Dollar, which is 11%. So you’re making a guess as to whether the Central Bank will depreciate it faster or slower than the interest rate differential. And that’s trying to anticipate a central bank’s intervention policy. That’s very tough to do.”
Brazil’s introduction of its “IOF tax” – a tax on À QDQFLDO RSHUDWLRQV LQ -XO\ LV D PRUH UHFHQW FDVH in point. In a research note at the time David Beker, chief Brazil economist and currency analyst at Bank of America Merrill Lynch in Sao Paolo, pointed out that once the USD/BRL rate had crossed the 1.55 level the government had intervened to curb further appreciation of the Real. “The two key points,” he wrote, “were the provisional measure in which the CMN (National Monetary Council) [took] charge of implementing FX measures, and the presidential decree in which the government implemented a 1% IOF tax on the increase in short USD-BRL positions on derivatives held locally. Notably, the provisional measure gave much power to the CMN, which is consistent with the speech by Finance Minister Mantega where he stated that if the measures do not avoid further BRL appreciation, the government would announce more.”
Ominous, especially for those currency investors keen to seize the opportunity to gain from Brazil’s growth story through the appreciation in the value of the currency while enjoying a VLJQLÀ FDQW OHYHO RI FDUU\
Beker began his note under the headline “LATAM re-entering currency war,” “With the ongoing deterioration in the global growth backdrop and the renewed outlook for low yields in the developed world, pressure for appreciation in LATAM currencies has increased,”
78 Currency Investor | Autumn 2011
Chart 3: …especially relative to the past decade
it read. “This is stoking the currency war among countries, with Brazil taking the lead.” Fortunately Mexico hasn’t followed suit, which is one reason at least for its continued popularity among some managers and investors.
“We prefer Mexico to the Real,” explains Colin
Harte of Baring
Asset Management, who runs Barings’
Alpha Currency Funds currency hedge fund. “It’s cheaper and both the central
EDQN DQG WKH À QDQFH PLQLVWU\ DUH open to appreciation. They operate a peg system to some extent but they are open to free market movements whereas you are not seeing this in Brazil where they have very high real interest rates and the currency is at well above pre-Lehman
levels. The central bank is trying to resist further appreciation. It is therefore open to debate whether Brazil is still quite cheap.” Similarly Panama, which is closely correlated with the Dollar, is popular with some managers because of its hands-off approach. Colombia meanwhile as David Beker points out, has a good economic story to tell “…but there is always a risk that the government implements legislation
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