South Africa surprised last week with it’s interest rate cut, bringing it’s prime rate down to 10%.
Inflation is at 5,7%, which is just a tad under the maximal treshold of the SA Reserve Bank; stressing the boldness of the move, especially if one knows to which extent Eskom electricity rates will go up in April (and continue to raise it’s prices beyond April).  But the newly appointed South African Bank Governor Gill Marcus had to put a populistic stamp to please president Zuma, who is increasingly turning to the left.

In Brazil meanwhile Reserve Bank President Henrique Meirelles announced he will stay in post, despite the October elections ahead; only this announcement made the real increase further in value.  Meirelles also announced that the focus of the reserve Bank will remain on inflation control; somewhat in contrast to South Africa.  Inflation is at 5,17% and the SELIC intrest rate is currently at 8,75%.

Against the dollar the Real looks to end 2010 at a stable rate compared to end 2009; against the Euro though…

Tags: brazilian real 2011

Globo published today an article on the rise of the Brazilian Real against the US$ since the beginning of 2009. This graph speaks for itself: The Brazilian Real appreciated 25,49% since, the Chilean Peso 14,06% and the Argintinan Peso 10,95%.

One might argue that despite this 25% appreciation of the Brazilian current, the Brazilian commercial balance yielded a 21,69 billion US$ surplus since January 2009.  Just as one might argue that despite the depreciation of the dollar, the US trade deficit in August is still a hefty 3,6% of US GDP.

The IMF projects the Brazilian GDP to clock 2009 with a 0,3% growth; one of the few countries which will not end up in red.  The growth for 2010 is projected to be between 4,5% (IMF) and 5% (Mantega).

I have warned a year ago on this upcoming currency turmoil. Just look at the Chinese Yuan: it stayed in 2009 completely on-par with the dollar, Asia has been intervening heavily to support the dollar.  Brasil did also buy some dollars, yet on a more modest level.  Mantega himself said earlier in October “there’s nothing more Brasil can (read: wants) to do.

Meanwhile China’s press is fulminating against claims that the renminbi must be revalued. An editorial in Xinhua last week had this to say:

The Group of Seven rich nations have again pushed developing China to appreciate its currency, the RMB yuan, so as to promote a so-called “more balanced growth”. On Saturday, G7 central bankers’ meeting held in Turkey’s Istanbul failed to produce any significant boost to the world economy. Instead, they turned fire on China’s currency, blaming it for the financial crisis.
In so doing, the rich nations have obviously intended to shirk their due responsibilities in the wide-spreading global financial turmoil.  As it is known to all that the current crisis has been a result of developed countries’ lax financial regulation, excessive consumption and their lasting monopoly on the international financial system.

Everyone seems to agree that as part of the necessary global rebalancing the US will have to reduce its net imports, and this will be achieved in part by a depreciation in the value of the dollar, but everyone also seems to agree just as fervently that any reduction of the US trade deficit should not come at their expense, but rather at the expense of the rest of the world.Europe says it is Asian that must appreciate, Asians implicitly insist that it is Europe that must appreciate. It doesn’t take a PhD to see the mathematical difficulty.

My reaction to this is: Brazil already appreciated its currency, while the impact for Asia and Brasil is still ahead.

And you ask why Brasil’s growth is still healthy despite it’s 25% currency appreciation?  The answer is: it’s internal market.

The US will fight like a woonded lion to depreciate its currency against the Yuan and the Euro; read this article in the Financial Times of last Thursday.

But I believe the US won’t win this one.  The fact is that these trade disputes are not going to go away, and because each side has legitimate complaints, or at least what seems like legitimate complaints to domestic audiences, without serious global coordination (can take ages) the only very likely outcome is even more trade disputes. And these are disputes which will be won by the country or countries that control the one resource everyone in the world wants: net demand.  And net demand is something Brazil has plenty of and China is short of.

This means that if surplus countries don’t allow for a rapid and orderly adjustment of the imbalances, which will require a rise in the value of their currencies among other things, the same thing will be achieved by trade conflict. Meanwhile Brazil should focus on the sovereign fund plans they have, it will be strong economical weapon in the oil-rich future.

End September, Merrill Lynch published its monthly FX forecast.  The USD trades now at 1,73 agains the BRL, they consider the USD still to be 10% overvaluated against the BRL and project it to fall to 1,6 against the BRL.  This is exactly the June 2008 when the BRL was trading at its top level.  Completely aside: also take notice of the South Africa Rand, which they consider to be 16% overvaluated against the USD.

More interesting even are the future projections they make.

1. The US Dollar versus the Brazilian Real
They project the dollar to appreciate 7% from end December 2009 till March 2010, but eventually by end 2010, the dollar would fall against the Real to 1,65 (3% less then  the end 2009 rate).

2. The Euro versus the Dollar:
The Euro would continiously fall against the dollar throughout the coming year and end at 1,28 against the dollar, that is a 17% decrease in value.

1+2 would mean that the Euro would fall 20% against the Real from today until end 2010.  This would mean that by end 2010, the Euro would trade at 2,12 against the Real.   This seems highly unlikeable to me (give and take you get 2 Reais for 1 Euro).  On the other hand: I do agree that the Euro will fall against the dollar by 2010 and that the Brazilian Real will more or less remain it’s current rate against the dollar.

This week’s Business Week features an article on the expanding Brazilian middle class.

Some quotes:
Just as important, though, is Brazil’s huge domestic market. While outsiders focus on the country’s shipments of iron ore, steel, and soy to China, exports are just 12% of Brazil’s $1.5 trillion economy. It’s the 190 million people and the fast-growing middle class—now more than half the population—that drive growth.
The country’s improving prospects create huge opportunities for entrepreneurs small and large. “Brazil has had so many crises over the years, people got used to them,” says David Neeleman, the founder of JetBlue, who last December started a low-cost Brazilian airline called Azul (Portuguese for “blue”). “I don’t think they’re at all fazed by this crisis—everyone seems to be focused on buying their first car, getting their first credit card.
A beauty salon in Rio de Janeiro highlights the new middle-class buying power. Despite its location in the posh Ipanema neighborhood, the clientele is mostly housemaids, hospital clerks, and other women from relatively modest circumstances. The salon is the creation of Heloisa Assis, known as Zica. One of 13 children, she grew up in a slum supported by her laundress mother. Like many Brazilians of African descent, she had brittle, kinky hair that she says hobbled her chances of getting a decent job. Zica tested homemade potions to tame her unruly Afro and finally came up with a formula that created flowing ringlets. She patented her discovery and in 1993 opened a salon, calling it Beleza Natural, or “Natural Beauty.” She soon had customers lining up at 5 a.m.
That revived auto sales, which in June hit 300,000 vehicles—an all-time high. Even hapless General Motors is enjoying fat times in Brazil, where it’s investing $1 billion through 2012 to develop a new small car. Whirlpool, which has a 40% share of Brazil’s appliance market, has benefited, too. Sales jumped 20% in May and June compared with a year earlier.

If you really want to understand the Brazilian middle class, you should visit with your wife one of the Beleza Natural beauty salons and talk with some women there, ask them about their job, what they earn, what their earning growth was the last years, how they see the Brazilian economy evolving,…

We wrote previously on the Brazilian middle class, but the below graph of Business Week summarizes it best: today, more than 51% of the Brazilian families earn between 616 and 2.579 US$ monthly, consider that Brazil counts 191.200.000 habitants and that the vast majority of the middle class is geographically concentraded in the zone Belo Horizonte -  Rio de Janeiro – Curitiba – Porto Alegre, Sao Paulo and you realize what a massive buying power this represents.

The article refers to Whirlpool in Brazil (Brazilian brand name: Brastemp), which has a 40% share of Brazil’s appliance market and who’s biggest manufacturing plant is in Joinville.  Sales of Whirlpool jumped 20% in May and June 2009 compared to the previous year which was already a record-breaker.

Neeleman’s Azul started flying end 2008, now has a 70% seat occupancy and expects profit for 2009.

Many people are now jumping on the MSCI Brazil (EWZ) bandwagon.  We bought in early March and yielded a 47% rise, yet we took our profit last week and converted into BRF; more on this later.

Tags: Brastemp, BRF, EWZ

Last week, the Brazilian central bank announced that the country’s foreign exchange resreves have reached a record high of 209,5 billion US$.

The target of the Brazilian central bank is to further expand their foreign reserves to 300 billion US$.

Tags: brazilian central bank, brazilian foreign reserves

As predicted,the Brazilian Real went through the 2.00 US$ psychological barrier today.

Yesterday the commercial balance of Brazil  for May was announced: again a big surplus, this time of 2,6 billion US$.  Projections for 2009 vary now between 25-30 billion US$ trade surplus.
The Brazilian Central bank is buying dollars to prevent further appreciation of the Brazilian currency, but these efforts are not strong enough.

I believe Brazil will start taking measure to prevent further appreeciation of the currency:
- Start taxing short-term investments in fixed income
- Establish a minimum period for short term investments in equity market and fixed income investments
- Introduce some kind of waiting line where money would stay on hold, waiting to acquire local assets

Clearly it’s good that the Central Bank sits on top of this so that the very good export results don’t get jeopardized by appreciating currency.

Tags: brazilian real