More chaos south of the border as oil remains in the mid-$40s.
Real at record lows vs. USD. Almost perfectly correlated with the fall in the price of their oil in USD terms.
The real, the country’s besieged currency, fell 2.5% to 3.90 real to the dollar Thursday morning local time — a record low.
The currency USDBRL, +0.1091% has shed 44% of its value against the dollar so far this year, and analysts expect it to be one of the worst performing currencies against the dollar in 2015.Pressure being put on the govt to cut R$ spending and raise R$ taxes in response to downgrades by the agents of the morons (continued bearish). Brazil morons look like they are perhaps issuing in USDs; again from the above link:
The yield on the benchmark dollar-denominated 10-year note closed at 5.686, according to Tradeweb data, up from Wednesday’s closing yield of 5.57%.
Brazil credit rating cut to 'junk' http://t.co/AQWHpQ4j3q pic.twitter.com/VtE94YO1ui
— RT (@RT_com) September 10, 2015
Oh for God's sake.
ReplyDeleteWHY is there a need to borrow foreign currency? Just don't do it!
USA worship by second rate nations
ReplyDeleteMatt: perhaps you mean 2nd tier nations, or are you trying to offend Brazilians?
ReplyDelete"are you trying to offend Brazilians?"
ReplyDeleteIf it results in the people there then responding by taking their nation back then yes.....
Matt, if the national currency is dropping relatively to international markets this is what 'forces' them to acquire USD. There ain't enough demand for the national currency without pushing the currency down. You are trapped between decreasing purchasing power and deflation.
ReplyDeleteIt all comes down to local inflation though, if the local inflation is low and decreasing they should definitively print more of their own currency.
Acquiring foreign currency issuing debt obligations is something no one should do though, is just a recipe for disaster. But politicians do those things to avoid short term pain.
I,
ReplyDeleteThat is based on QTM concept of "supply and demand" as somehow applied to currency systems...
The financiers are not regulated on "quantity" they are regulated based on observed price/value of assets.
IOW if the price of a financed item goes down, then the financiers are out of regulatory compliance in the currency system where the price reduction is evidenced... as they run (or try to run) fully leveraged...
So they have to exchange something for more regulatory balances in the currency system that the price of the goods they are financing are falling in...
So a Brazilian bank (fiscal agent) would be seeking increased USD regulatory balances in its USD subsidiary as asset values are falling in USD terms .... it has to increase its bid for USD in $R terms... more $R per USD in the exchange system operated by the fiscal agents means the $R goes down in USD terms...
If the oil they are financing starts to go up in price the reverse happens, they are then in excess of regulatory balances in USDs so they shed USD regulatory balances....
Rinse and repeat.... rsp,
I'll rephrase: they need to acquire USD, and not just fore regulatory reasons, there are exports and there are imports. They need to import, and when they import they are effectively buying other currency. This reinforces the the trend as orders at a given price are cleared, and pushes to an other price level.
ReplyDeleteAt the same time, when the goods they export increase in value relatively to the goods they import, it would drive the currency up. In A -> B -> C we abstract (B) layer because it doesn't matter to the causation in the end.
Fundamentally what I'm saying is not in disagreement. Given the current export basket of Brazil, they cannot import more without dropping the value of the currency (as ultimately when they are importing they are buying foreign currency and paying with their own balances), and if prices of certain commodities and goods keep going down it keeps getting worse.
This is what i mean by "this is what 'forces' them to acquire USD". To maintain a certain level of imports, it forces them to acquire USD. So what is the "solution"? Issue IOU's in exchange of USD, those are prices is USD so they don't have to bid for USD @ market (that is, IF they want to keep the current level of imports).
OFC if the local inflation is low of non-existing the govt should go out there and bid for USD anyway as the exchange rate doesn't matter, what matters is there is or not inflation.
"they need to import, and when they import they are effectively buying other currency."
ReplyDeleteArent you assuming a US exporter demands to be paid in USDs for what they export to Brazil?
What if the US exporter will simply accept $R?
Then the Brazilian importer would not have to scramble around to get USDs to pay... probably have to look at invoices...
rsp,
When the OPEC people screw us.. er, I mean sell us oil..... I assume they invoice in USDs...
ReplyDeletersp,
Well, Brazil's central bank is presently holding precisely US$ 370.493 billion in reserves (see here: https://www.bcb.gov.br/?RP20150909 ) so the country is hardly suffering from a scarcity of dollars to pay for imports or to buy foreign assets.
ReplyDeleteWhat is driving down the value of the Real is not foreign trade - it's investors selling real-denominated assets to buy dollar or euro denominated assets.
The country's net creditor position in dollars underlines even more the total absurdity of the Treasury issuing public debt denominated in dollars. The country simply doesn't need it - it only provides fodder for the rating agencies to be able to downgrade the country's debt status whenever the government's macro policies are not to their liking for a protracted period - as had been the case until the end of 2014. .
Jose the net USD position was probably built up over time with the high oil prices... and is still going up just not at same rate...
ReplyDeleteSo it HAS to be about price not quantity... rsp,
As a matter of fact, Brazil's dollar reserves held at the central bank have been increasing despite persistent current account deficits.
ReplyDeleteFrom 2008 to 2014, Brazil had 7 consecutive years of deficits on current account for a cumulative USD 379 billion, yet its dollar reserves in the same period went up - from USD 180.3 billion in December 2007 to USD 374 billion in December 2014, a net increase of $193.7 billion.
"Arent you assuming a US exporter demands to be paid in USDs for what they export to Brazil?"
ReplyDeleteIf a US exporter demands to be paid in USDs, then they are not the exporter. The 'exporter' is then in Brazil.
The 'exporter/importer' should always be the one standing the currency exchange - where they buy in the foreign currency and sell in the local one. In this case USD/Real.
When you analyse it like that you find that the dividing line moves about countries dynamically, and the only difference is which currency they pay their fixed costs in (if in Brazil it'll be Real and if it is in the USA it'll be USD).
What's interesting is that *both* have the same issue - getting rid of Real and purchasing USD. But if the export/importer/exchanger is in Brazil there is *less* demand for exchange to USD than if the export/importer/exchanger is in the USA.
It all becomes clear when you look at *currency areas*. It is the edge of currency areas where the exchange happens, not countries.
Jose,
ReplyDeleteI agree with you.... The currency movements are dominated by so called Investment flows. Speculators liquidizing Real denominated assets and parking their loot elsewhere.
At some point these Brazilian assets are going to look mighty attractive in USD terms. I would expect the exchange rate to stabilise after a bit of oscillation.
The politicians also have a hard time dealing with the media frenzy and respond in a way that is rational (only) to themselves. Of course the financial porn channels like CNBC are paid to create the frenzy and banks profit from the churn.
I assume the correct policy option to be do nothing and wait for the bounce.
Then the Brazilian importer would not have to scramble around to get USDs to pay... probably have to look at invoices...
ReplyDeleteMatt this is what i said last time we discussed this, to know we need to look at the transactions themselves.
Jose says that USD reserves have been rising, I see this as consistent: you liquidate assets in Real and purchase assets in USD, so you acquire USD. As you say: it's about the price, not the quantity.
I always assume for simplicity commodity exporters are looking for dollars more than the other way around. That has been my practical experience too in North Africa (with the euro this time). No one wants the national currencies, certainly not the Europeans (which try to reduce risk as much holdign as little as possible of it), but neither the nationals (and the higher you go in government/corporations the more they like the euro).
Yeah, they have little faith on their own nations... what you gotta do. Not comparing Brazil to North Africa, but to a lesser degree is probably the same. Same with many Asian nations.
It's about who wants something more. Do you want USD more than you want oil at a given point in time, or do you want oil more than you want USD? If demand for oil is going down, then the USD has to go up naturally.
ReplyDeleteIt's a lot about portfolio management too: you change the mix of your portfolio because at certain points some assets in what monetary region (ie. US Treasuries, stocks, etc.) become more attractive than your own (ie. EM bonds and stocks). So you liquidate and buy assets denominated in other currency, this pushes the price up (of the other currency area). Sometimes is the other way around: EM will look attractive and will trigger disinvestment in developed currency areas and investment in emerging market areas.
Even when growing a lot of the EM profits are continuously being repatriated (this are the infamous 'flows' economists talk about).
Andrew,
ReplyDeleteThat's also my opinion - the government/CB doesn't really have to do anything because sooner or later the movement will reverse and short sellers of real will get their fingers burnt.
But this is easier said than done. A deep depreciation impacts GDP positively but leads to higher inflation, which for historical reasons is abhorrent to many people in Brazil. It also raises the debt ratios of firms who sell mainly in real but were foolish enough to get financing in dollars. The temptation to intervene and manage the floating rate system will thus be great.
In a floating rate system, a reserve currency is the substitute for the fixed rate exchange, e.g., gold or silver. It is not only the medium of exchange in trade but also the "store of value" in which those doing cross-border transactions prefer to save because a reserve currency is more liquid and stable.
ReplyDeleteMoreover, in the current system oil is traded in USD.
So the international trading system under a floating rate regime pivots on a reserve currency just as a fixed rate system does on gold. The big difference is that gold is a constant entity and currencies are dependent on financial, economic, and geopolitical conditions. As long as the US is the most powerful country with the largest and most stable economy and financial system, the USD will be in demand as the dominant reserve currency.
There are two major factors influencing the relative values of currencies to a reserve currency. For example, the USD is assigned the value of 1 and other currencies are value relatively to it.
The first is economic, that is, trade. USD are the primary vehicle for final settlement since everyone prefers to save in terms of it. That's what "foreign reserves" means pretty much. Countries need the reserve currency to settle among themselves even when the transaction doesn't directly involve the US.
The second is finance. Countries need reserves to support their currencies owing to "confidence." Even though gold is not longer in use as a reserve, countries feel they need to hold gold reserves to create confidence. Same with foreign reserves, now the USD.
Currencies appreciate and depreciate relative to each other against the reserve currency based on both economic and financial factors, which is a reason that writing an equation to predict changes in the market is virtually impossible — too many balls (variables) in the air.
The longer term fluctuation are based mostly on economic factors relating to trade and the shorter term factors on finance, that is, speculation about relative strengths and therefore moves. Traders will naturally anticipate longer terms moves based on changing economic factors, financial factors, and geopolitical factors.
Changes in currency value affect economies through shifting saving desire. "Risk on" means flee to safety, usually in the USD. "Risk off" means shift to other currencies in expectation of a recovery in their relative strength.
One factor might be dominant wrt to currency but limited to that currency zone and conditions there. For example, oil price and the ruble are inextricably linked as long as the Russian economy is perceived to be dependent on oil sales to fund government (which is silly since Russia has a floating rate currency now, but that is the perception that rules).
In fact, from the MMT perspective a lot of beliefs about currency are incorrect, but as long as perceptions dominate, traders will trade their beliefs.
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ReplyDeleteCurrencies appreciate and depreciate relative to each other against the reserve currency based on both economic and financial factors
ReplyDeleteThe key figure to keep in mind is that foreign exchange flows are almost 20 and 70 times as large as the "real" flows of GDP and trade in goods and services, respectively.