Central Bank currency intervention to have short-lived effects

. Feb 14, 2020
economy minister paulo guedes currency brazilian real Photo montage: Edu Andrade/ASCOM/ME and SvetaZi/Shutterstock

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We’re covering today what is happening to the Brazilian currency. Big banks are still profiting … for now. And the latest twist in the killing of a crime boss with links to the Bolsonaro family.

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Guedes talks, the currency drops 

A day after Economy Minister Paulo Guedes said a weak Brazilian currency is “good for everybody,”

the Central Bank intervened in the currency derivatives market by selling USD 1 billion in foreign exchange swaps—a move usually aimed at taming speculation. The strategy triggered a reversal in the USD-BRL rate, from over 4.38 during the day to 4.33 at closing.</p> <p><strong>Why it matters.</strong> The case reignited debates over the handling of international reserves, which protect the country from external shocks—but come at a high cost.&nbsp;</p> <p><strong>Going down.</strong> Over 2019, Brazilian reserves have already diminished by USD 23 billion, helping to slash the fiscal debt. But Cleber Alessie, a foreign exchange trader at Commcor DVTM, does not see a reason for concern. “I believe this government considers it healthy to partially diminish its reserves to reduce debt, but it has to be done carefully. I don’t think they would sell it without cause,” he told <strong>The Brazilian Report</strong>.</p> <div class="flourish-embed" data-src="visualisation/597570"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <p><strong>Effects.</strong> If recent history is anything to go by, this respite for the Brazilian Real is likely to be short-lived. In November, another Central Bank intervention in the spot market steadied rates for about a month.</p> <p><strong>Explaining the currency trend.</strong> <a href="https://brazilian.report/newsletters/brazil-daily/2020/02/13/brazilian-currency-real-usd-lows-onyx-lorenzoni-lula/">Year-to-date devaluation</a> of the Brazilian Real is close to 8 percent. And while Mr. Guedes&#8217; words may have added pressure to the currency, its recent drops are also linked to the fears of the Covid-19 outbreak&#8217;s impact on the global economy, disappointing economic indicators, and an all-time low benchmark interest rate.</p> <p><em>—with Natália Scalzaretto</em></p> <hr class="wp-block-separator"/> <h2>Big banks can&#8217;t stop winning. Or can they?</h2> <p>Net profits of Brazil&#8217;s four largest publicly-listed banks (Itaú, Bradesco, Banco do Brasil, and Santander) jumped 18 percent in 2019 to a whopping BRL 81.5 billion, a record in nominal terms. But the future might not be so bright. Last year, the Central Bank indicated that banks&#8217; profitability curves show signs of strain—“due to the exhaustion of the reduction in provisioning expenses and the expectation of a contraction in operating efficiency gains.”&nbsp;</p> <p><strong>And … </strong>As we reported in our <a href="https://brazilian.report/newsletters/brazil-daily/2020/01/21/unemployment-brazil-here-stay-ilo/">January 21 Daily Briefing</a>, Bank of America downgraded stocks of Brazilian banks. Analysts foresee a “sharp deceleration” in growth rates this year, from 20 percent in 2019 to just 2 percent.</p> <div class="flourish-embed" data-src="visualisation/1263996"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <p><strong>Why it matters.</strong> Financial institutions account for 24 percent of the Ibovespa, Brazil’s benchmark stock market index. Poor results could have a profound impact on the market as a whole.</p> <p><strong>Changing landscape.</strong> For decades, banks profited from a highly-concentrated market that allowed them to slap multiple fees on consumers. But the scenario has become less favorable to traditional strategies, with fintechs offering no-fee services and investing big bucks in innovation and IT.</p> <p><strong>Downsizing.</strong> Over the past eight years, private banks have scrapped 67,200 jobs according to the Labor Ministry. And in 2019, Itaú and Bradesco alone shut down 500 branches. Such numbers are a reflection of Brazil&#8217;s move towards digital banking.</p> <hr class="wp-block-separator"/> <h2>Death of Bolsonaro-linked crime boss could be execution</h2> <p>On Sunday morning, the Military Police in Bahia killed former policeman Adriano da Nóbrega during a search operation (<a href="https://brazilian.report/power/2020/02/12/bolsonaro-adriano-nobrega-militia-organized-crime/">Euan Marshall explained the case on <strong>The Brazilian Report</strong></a>). He was considered one of the leaders of the so-called &#8220;Office of Crime,&#8221; a death squad operating in conjunction with one of Rio de Janeiro&#8217;s longest-running paramilitary police mafias. In this weekend&#8217;s issue, <a href="https://veja.abril.com.br/brasil/fotos-de-adriano-da-nobrega-morto-fortalecem-suspeita-de-queima-de-arquivo/">magazine <em>Veja</em> publishes photos</a> that suggest Mr. Nóbrega&#8217;s death was not incidental, as police say, but rather execution.</p> <p><strong>Evidence.</strong> The magazine obtained autopsy photos of the body, showing wounds consistent with close-range shots and downward bullet trajectory—telltale signs of an execution. Officially, the former policeman was killed in a shootout.</p> <p><strong>Why it matters.</strong> Mr. Nóbrega was a pivotal element in two important cases: a money-laundering investigation into Senator Flávio Bolsonaro (two of his family members formally <a href="https://brazilian.report/power/2019/01/23/flavio-bolsonaro-death-squad/">worked in the office of the president&#8217;s eldest son</a>), and in the killing of Rio City Councilor Marielle Franco—an assassination that police have said may have been carried out by the Office of Crime.</p> <p><strong>Weirder and weirder. </strong>Mr. Nóbrega&#8217;s family wanted to cremate the body as early as Wednesday—only three days after his death—but were stopped by a court order. On Twitter, Flávio Bolsonaro denounced what he saw as efforts to “speed up the cremation,” allegedly in an attempt to disguise that he had been “brutally assassinated,” leading to much suspicion over Mr. Bolsonaro’s own motivations to make such a statement.</p> <hr class="wp-block-separator"/> <h2>What else you need to know today</h2> <ul><li><strong>Cabinet.</strong> One day after removing Onyx Lorenzoni as Chief of Staff, President Jair Bolsonaro promoted a cabinet reshuffle and handed the Citizenship Ministry (which oversees social programs such as Bolsa Família) to Mr. Lorenzoni, with former minister Osmar Terra returning to Congress. His style of handling cabinet alterations is yet another way in which Mr. Bolsonaro distinguishes himself from predecessors—previous administrations would announce changes at once, instead of in bits and pieces.</li><li><strong>Embassy.</strong> The Senate&#8217;s Foreign Affairs Committee approved Nestor Forster to head the Brazilian Embassy in Washington D.C.—but the nomination must first be ratified by the Senate floor. Mr. Forster got the job after President Bolsonaro was unable to muster enough support for his own son Eduardo. In his confirmation hearing, Mr. Forster minimized data about increasing numbers of Brazilian nationals being deported from the U.S., saying &#8220;there is not all this drama the press writes about.&#8221; The number of Brazilians arrested for illegal immigration in the U.S. increased tenfold in a year to 18,000.</li><li><strong>Violence.</strong> Brazil registered a 19-percent drop in the number of victims of violent crimes between 2018 and 2019, according to official data from all 27 states. There were 10,000 fewer murders (or 41,600 cases) in 2019, making it the lowest total since 2007. Despite the positive trend, one-third of states showed increases in their number of murders over Q4 2019.</li><li><strong>Climate change.</strong> Brazilian scientists based in Antarctica have recorded abnormally high temperatures in the region this year. On Sunday, temperatures on Marambio Island reached an all-time high of 20.75 <sup>o</sup>C. The data goes along with recent findings by the U.S. National Oceanic and Atmospheric Administration showing that temperatures in January 2020 were 1.14 <sup>o</sup>C higher than the average for the 20th century. In Brazil, the climate is getting more extreme, with shorter—and more intense—rainy seasons, as <a href="https://open.spotify.com/show/4Y4LwDEoRM5fQb9dr8XdN9">we&#8217;ve shown in our <em>Explaining Brazil</em> podcast</a>.</li><li><strong>Truckers.</strong> The Supreme Court has postponed a trial on the validity of national minimum freight price tables scheduled for February 19—as the government will pull one last effort to promote a deal between truckers and cargo transport companies. While truckers threaten to go on strike—which could be <a href="https://brazilian.report/money/2018/05/25/truckers-protests-brazil-fuels/">devastating for the econom</a>y—unless they get better wages, firms say the reference tables go against the principles of free enterprise.

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