Our thoughts on the BRICs as they navigate some difficult circumstances have been focused on the efforts of central banks. The more desperate the measures they employ to “defend” their currencies, the more trouble exists and the greater the potential for further “tail risk”. That includes major imbalances spilling into seemingly unrelated markets.

Last week, the Banco Central do Brasil issued an emergency ruling to suspend reserve requirements on Brazilian banks’ short dollar positions. The intent here is to give the banking system room and cover to sell dollars to defend the real without intervention. After hitting a new low of about $2.26, the real has come back somewhat to around $2.19.

The measure took effect on July 1, and since forex markets opened the real has fallen back again all the way to $2.24. Usually these emergency measures are mostly about moral suasion and talking markets into a direction central banks want them to go. In this case, the Brazilian central bank doesn’t appear to have been fully successful or has been simply overtaken by markets that don’t want to adhere to policy directives.

In any case, this bears close scrutiny as it relates to both global trade conditions and market volatility (YTD the Bovespa is off more than 20%, -11% in June alone). Again, the premise here is a successful devaluation in a target like Brazil may kickstart currency runs across the developing/emerging markets. But unlike 1997-98, the targets in question are the big countries with close global finance and trade ties.

 

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