Wednesday, July 3, 2013

The Weakening Brazil Real

The Brazilian Real settled at 2.27 to the US dollar today, its weakest closing since 2009. The WSJ says that the currency has lost 11% this year and the country is in a "sticky situation" due to several factors, including a recent decline in industrial production, high inflation, and political uncertainty due to protests. "The once dynamic Brazil has not only lost its luster as a fast-growing economy but is also becoming a risky place to seek returns."

Increasingly similar to Monopoly money

Not all of this is Brazil's fault. The US dollar has gained against most currencies, especially after a Ben Bernanke speech where he mentioned the possibility of scaling back the Federal Reserve's infamous quantitative easing program if the economy picks up. Many observers, such as Peter Schiff, think the tapering "is about as likely as an NSA-sponsored ticker tape parade for whistleblower Edward Snowden".

So what are the immediate effects of the weakening of the Real? First of all, Brazilian residents face higher foreign tourism prices. Of the thousands of Brazilian families going to Florida during the July winter break to visit Mickey Mouse and the outlet malls, all will feel the impact on their wallet. However, prices at Sawgrass Mills will continue to be significantly lower than in Brazil.

Another effect of the weakening currency is the cost increase for imported goods in Brazil. This could worsen the already stretched official inflation number, which is already running above the government's ceiling of 6.5%, but its main impact is simply to decrease the purchasing power of the average Brazilian.

Is there a bright side? Maybe. Foreign tourists in places like Rio de Janeiro will pay less to visit Sugarloaf. And the weakened Real is spurring coffee sales from the world's largest producer and, as a result, lowering your future Starbucks bill world coffee prices.

One year graph showing USD to BRZ exchange rate.
Not a pretty roller coaster if you earn Reais.

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