Currencies and global imbalances

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.