Is the Brazilian currency at an all-time low? Not exactly

. Nov 15, 2019
Is the Brazilian currency at an all-time low? Not exactly

If you are read the Brazilian press, one topic may have stood out this week: the loss of value of Brazil’s currency against the U.S. Dollar. The Real has lost ground, with the exchange rate closing the week at USD 1: BRL 4.1958, the second-highest gap in history. 

The fluctuation was influenced by threats from U.S. President Donald Trump to toughen negotiations with China to end the trade war between the world’s top superpowers—capping an 8-percent devaluation from the BRL in 2019.

</p> <p>However, that doesn&#8217;t exactly mean the USD is that close to its record price in Brazil. That BRL 4.1958 mark is the <em>nominal</em> exchange rate. In these absolute terms, yes, the greenback is close to its highest-ever value against the Brazilian Real. But when we discount for inflation, the current exchange rate doesn&#8217;t come anywhere near the <a href="">hikes</a> we observed in September 2002, when Luiz Inácio Lula da Silva was on the cusp of a first presidential win.</p> <p>In the previous three elections, Lula finished in second place with proposals of high state interventionism in the economy. In 2002, however, he toned down his rhetoric, and the image of an angry, bearded rabble-rouser had been replaced by a smiling, relatable version of the former trade union leader—something that became known in Brazil as “Peace and Love Lula.”</p> <p>Still, markets were skeptical. The withdrawal of USD from Brazil was at full steam, making the stock market highly unstable. At that point, the exchange rate was USD 1: BRL 3.76—which, in today&#8217;s values, would be much, much higher, as we show in the following chart. As we know, of course, Lula came to win the election and promote many pro-market measures. <a href="">Banks profited like never before</a>, as did stock market operators.</p> <hr class="wp-block-separator"/> <h4 style="text-align:center">USD-BRL currency rate</h4> <figure class="wp-block-image"><img src="" alt="usd brl brazilian currency" class="wp-image-27669" srcset=" 1024w, 300w, 768w, 610w, 1286w" sizes="(max-width: 1024px) 100vw, 1024px" /></figure> <hr class="wp-block-separator"/> <h2>Controlling the exchange rate</h2> <p>The mark of BRL 4.20 against the dollar is something of a psychological threshold for investors. The last time the mark was “threatened” was in August—leading the <a href="">Central Bank to hold multiple USD auctions</a> on the spot market. Brazil has resisted doing that in the past, to avoid burning through its international reserves, and that shows just how much it means to hold the USD below 4.20.</p> <p>The recent series of hikes of the greenback against the Brazilian currency started on November 6, after the flopped “mega” auction of pre-salt oil fields. The government was hoping to raise BRL 106 billion from the tender, but the total amount was just short of BRL 70 billion—with 90 percent coming from state-owned oil firm Petrobras.</p> <p>Since then, <a href="">Lula&#8217;s release from prison</a>, the crisis in <a href="">Chile</a> and <a href="">Bolivia</a>, and the U.S.-China disputes have pushed the Brazilian currency down further.

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