Volatility of the real, interventions and capital flows

BRAZIL ECONOMICS - Report 30 Aug 2019 by Affonso Pastore, Cristina Pinotti and Marcelo Gazzano

This Report has two objectives. The first is to present clear evidence that the behavior of the real is very volatile, justifying the Central Bank’s interventions trying to smooth out the exchange rate fluctuations. The theme of these interventions – and the recent change of the intervention instrument by the Central Bank – was addressed in our last Weekly Bulletin. Here we present further evidence about this “excessive volatility” and explain why we believe the Bank will continue to intervene, be it in the spot market or through currency swaps.

Second, along with the net outflow of capital (partly due to the real’s excessive volatility), the most recent data on the balance of payments indicate the current account deficit is rising. This movement is largely explained by the trade balance, which is perfectly compatible with the deceleration of global growth and downward trend of commodity prices. But there has also been an increase of imports that deviates from the historical pattern. Until recently, the country’s imports closely followed industrial production, but lately they have been accelerating in relation to industrial output. There is no obvious cause of this structural break. But the observation must be made that if economic activity were recovering faster (particularly of industry), the trade surpluses would tend to fall (should this pattern of imports continue) in relation to the past pattern. This, together with the net capital outflow, would put more pressure to weaken the exchange.

Now read on...

Register to sample a report

Register