Brazil's Real Weakens as Companies Buy Dollars Near 5-Year Low
2006-03-06 08:24 (New York)


By Elzio Barreto
March 6 (Bloomberg) -- Brazil's real fell as some companies
bought U.S. dollars near its weakest level since March 2001 to
send profits and dividends abroad.
Brazil's currency has weakened over the past two days on
increased demand for dollars from companies seeking to
repatriate profits, an outflow that may accelerate the coming
days, said Helio Ozaki at Banco Rendimento SA.
``We have seen these dollar purchases for repatriation of
profits and dividends quite frequently in recent days,'' Ozaki,
a currency trader at the brokerage, said in a telephone
interview from Sao Paulo.
The real weakened 0.5 percent to 2.1210 per dollar at 8:18
a.m. New York time from 2.1100 late March 3. The real is up 25.2
percent in 12 months, the best performance against the dollar of
the 16 major currencies. On March 2, the real reached 2.1024 per
dollar, its strongest since trading at 2.0910 on March 21, 2001.
The dollar futures contract for April 1, 2006, settlement,
the most-widely traded on the BM&F commodity and futures
exchange in Sao Paulo, exchanged hands at 2.1410 reais per
dollar, compared with 2.1296 reais on March 3.

Balancing

Investors may also seek dollars to cut possible losses on
forward rate agreements, which track the variation in the
exchange rate and the variation in the benchmark interest rate,
Ozaki said.
Brazil's central bank on March 8 will cut the benchmark
interest rate to 16.50 percent, from 17.25 percent now,
according to the median estimate of 19 economists in a Bloomberg
News survey.
``The real is undergoing a very favorable scenario, with
several economic figures signaling ample inflows, so the only
factor that would interrupt that trend would be a bigger-than-
expected cut in the benchmark interest rate that would cut the
return on the forward contracts,'' Ozaki said.
The yield to the 2015 call date on Brazil's benchmark 11
percent bond due in 2040 rose to 6.51 percent and the yield to
maturity rose to 8.26 percent from 8.23 percent March 3,
according to JPMorgan Chase & Co. The bond's price, which moves
inversely to the yield, fell 0.35 cent on the dollar to 131.15.
The bond closed at a record high of 133.30 on Feb. 27.

Credit Suisse Sees Stronger Brazil Currency on Tax Cut, Inflows
2006-03-20 06:20 (New York)


By Guillermo Parra-Bernal
March 20 (Bloomberg) -- Credit Suisse Group raised its
forecast for the Brazilian real on expectations a tax cut on
foreigners will bolster international investment in Latin
America's largest economy.
Credit Suisse, Switzerland's second-biggest bank, raised
its year-end forecast for Brazil's currency to 2.15 reais per
dollar from 2.3 reais, Credit Suisse said in a report today.
The early repayment of sovereign bonds, a reduction in the
government's needs for foreign currency and a decline in risk
perception will also help strengthen the real, the report said.
The bank reiterated its $39 billion forecast for the trade
surplus this year and trimmed its estimate of international
reserves to $62.5 billion from $73.3 billion previously. The
bank also said that the central bank may buy $23 billion of U.S.
dollars from the local currency market this year.

Brazil: Abundance of Dollars

Gray Newman (New York) and Heloisa Marone (New York) and Franklin Adatsi (New York)




It may seem like currency déjà vu. After rallying for the past month and a half to reach the strongest level in five years, Brazil’s real has come under pressure, and last week gave up a month’s worth of gains. While last week’s move from near 2.05 to just over 2.14 is in itself very modest, especially in light of the currency’s three and a half year rally, the sharp move has once again raised the usual concerns. Locals are blaming the central bank, which in the first two weeks of the month accelerated its dollar purchases, exceeding those made during the entire month of April. Meanwhile, foreign players are wondering if the recent turmoil in commodity, equity and US Treasury markets is likely to take its toll on risk taking and, with it, the Brazilian real.

While a bout of risk reduction is certainly possible, we would argue that any sell off in the real is likely to represent an opportunity. Indeed, we suspect that the most likely outcome is that of the Brazilian real trending stronger in the coming months. By mid-year we suspect that the real will be trading below 2.0 and closer to 1.9—a level that could persist for months to come.

Our bullish real view is based on three elements. First, inflows remain extremely strong. Brazil’s trade surplus in the twelve months ending in April stood at $45.5 billion, slightly higher than where it ended 2005. Second, the only reason the real has not been even stronger in the past seven months has been the aggressive intervention on the part of the central bank. Third, we suspect that even if the central bank continues its current interventions, it is likely to provide a boost to the real at the end of the month when the central bank announces a more cautious stance on the pace of monetary easing. Even if the central bank cuts by 75 basis points on May 31 instead of the 50 basis points we are now expecting, we expect the minutes set for release on June 8 to be even more explicit that the central bank is weighing in either a pause or a slower pace of rate reductions going forward.

What trade blues?

For all of the talk that the strong real is damaging Brazil’s competitiveness, Brazil’s trade surplus is showing little loss. As of the end of April, Brazil’s twelve-month trade surplus stood at $45.5 billion, just shy of the new record set the previous month and still above the 2005 close. Although export growth has slowed in recent years, exports continue to grow, clocking in nearly 17% y-o-y during the first four months of this year. And although much of the uptick in export levels has been price related, we have yet to see a decline in volumes whether we look at exports of primary goods, semi-manufactured goods or manufactured goods.

We are not trying to argue that, because the trade balance has remained strong in the first months of 2006, it will continue uninterrupted. It is hard to imagine that the real can continue to strengthen, or even remain at its current level, without a downturn in export volumes and a further uptick in imports. Instead, our point is that the turn has yet to take place.

Furthermore, even when the trade balance does begin to deteriorate, we would argue that after an initial bout of currency weakness, it is hard to argue that the currency adjustment would need to be permanent. Brazil needs a currency that is consistent with a financeable current account deficit, not a currency that maintains a current account surplus.

It’s true that import demand is gaining ground even as export growth is slowing. Brazil’s three-month trend import demand increased from 11% through January to just over 27% through April, while export growth is moving in the opposite direction going from just under 25% growth in three-month trend through January to 16% by April. Even if the pace of import demand continues to gain through the rest of the year and export demand slows further, we would still end up with a trade surplus by year-end near $39 billion. A simple but perhaps extreme extrapolation—working from the most recent three-month trends—and extending to the end of 2007 would lead to the trade surplus shrinking to roughly $12 billion by the end of next year. But even in that case, the current account balance would turn to a deficit only of roughly 2% of GDP, hardly a level that should be difficult to finance.

Another buying spree

After accumulating nearly $12 billion in the last three months of 2005 and another $10 billion in the first four months of 2006, the central bank appears to have accelerated its pace in early May. As the real broke through 2.10, the volume of intervention picked up sharply. We estimate that in the first two weeks of May, the central bought up nearly $4.1 billion: up sharply from a monthly average of $2.5 this year.

While we believe the central bank when it argues that it is not targeting the exchange rate, its moves almost guarantee that market participants will begin to re-examine the currency and ask whether the central bank has a currency target. Add to that recent statements from the finance ministry that have been interpreted by many in the market as signalling that the central bank has the currency in mind as it builds reserves, and it is not hard to see how the markets view the reserve accumulation policy. By so aggressively accumulating reserves—reserves net of the IMF nearly doubled last year—at such a significant cost, investors are bound to be asking how much longer the reserve build-up can go on.

Rate reduction pace to slow

Finally, we expect the central bank to adopt a more cautious stance on the pace of monetary easing. The authorities have two opportunities in the coming weeks to do so. They can either reduce the pace of easing from 75 basis points to 50 basis points on May 31 when the Copom next announces a decision or the authorities can release a more explicit statement warning that smaller cuts or even a pause are in the works with the release of the minutes on June 8.

While the inflation scenario has been doing remarkably well—headline IPCA stood at 4.6% in April and is likely to fall below the year-end target of 4.5% in May—we expect the central bank to slow the pace of rate cuts. As the central bank noted in its last minutes, the lagged effects of past rate cuts and fiscal stimulus are likely to feed into aggregate demand and could add to inflationary pressures in the months to come. The uncertainty from the inflationary consequence from these lagged effects should increase the central bank's conservative stance. Especially, as the central bank highlights that the Selic rate is approaching a "medium-term equilibrium".

Bottom line

Once again the spectre of risk reduction raises its head and threatens the Brazilian real. We don’t want to appear heroic and certainly would not ignore the turmoil in global markets in recent days. But short of a major repricing of risk, we suspect that Brazil’s currency is still attractive and if anything, in the coming months, should tend to appreciate further. With a powerful trade surplus and a central bank likely to signal that its rate cutting is likely to be tempered, we doubt that currency intervention alone from the central bank can keep the real from breaking below 2.0.

quem se posicionou na sexta, amanhã paga a rodada!!

Política derruba Bolsa ao menor nível desde junho; dólar passa de R$ 2,20
Da Redação
Em São Paulo

A Bolsa de Valores de São Paulo (Bovespa) fechou com queda de 1,04% nesta quinta-feira, aos 34.830 pontos, no menor patamar desde 27 de junho. O volume financeiro somou R$ 2,7 bilhões. O dólar teve o terceiro dia de alta, subiu 1,38% e fechou em R$ 2,208, superando a barreira dos R$ 2,20 pela primeira vez desde julho.

Os mercados foram pressionados por uma combinação de eventos desfavoráveis. A piora dos índices acionários nos Estados Unidos, as crises em países como Tailândia e Hungria, e a turbulência do cenário político doméstico configuraram um quadro pessimista no pregão brasileiro.

Para o gerente de renda variável do Banco Votorantim, Pedro Thomazoni, a principal pressão sobre a Bolsa paulista veio do mercado internacional.

Os últimos acontecimentos na Tailândia e na Hungria fizeram os investidores olhar com mais atenção para os desdobramentos internos de qualquer mercado, o que trouxe uma certa complicação para o Brasil, disse.

A elevação da tensão política, normal na reta final para as eleições, coincidiu com um momento em que o clima no mercado está mais negativo, avaliou.

Cãmbio
O dólar teve o terceiro dia de alta nesta quinta-feira e fechou acima dos R$ 2,20 pela primeira vez desde julho, em meio a um movimento de aversão a risco, que afetou os países emergentes, e um cenário político pré-eleitoral mais tenso.

A divisa norte-americana subiu 1,38% e encerrou vendida a R$ 2,208, o maior preço de fechamento desde 14 de julho. Em três dias, o dólar acumula alta de 2,84%.

"Primeiro que você tem bastante especulação", comentou Mário Battistel, diretor de câmbio da corretora Novação.

"Tem o problema político aqui, que está complicado, problema na Ásia, tem um grande player que estava perdendo muito dinheiro apostando em gás e está se desfazendo de posição em emergentes para cobrir o rombo. Tudo isso está afetando", completou.

Os títulos de países emergentes sofreram nesta quinta-feira e o risco-país subia 17 pontos à tarde, para 245 pontos-básicos sobre os treasuries (títulos americanos).

Entre os fatores que provocaram uma aversão a risco dos investidores estrangeiros, estão as preocupações com o crescimento econômico global e dos Estados Unidos, desdobramentos na Tailândia após o golpe de Estado nesta semana e notícias de que o fundo norte-americano Amaranth perdeu bilhões de dólares com apostas erradas em gás natural.

Somado a isso, as tensões políticas no Brasil em torno do chamado "dossiê Serra" e o suposto envolvimento do PT, a menos de duas semanas das eleições, acentuaram ainda mais o nervosismo do mercado e a curva de alta do dólar.

A agitação afastou o Banco Central do leilão de compra de dólares, depois de 54 operações diárias seguidas.

Quadro político tenso
A despeito da relativa calmaria do mercado nas últimas semanas em relação às eleições no país, os acontecimentos recentes ganharam mais peso sobre as cotações, principalmente em um mercado já receoso com o cenário externo.

Na quarta-feira, o deputado federal e presidente nacional do PT, Ricardo Berzoini, envolvido no escândalo do dossiê, foi afastado do comando da campanha de reeleição do presidente Luiz Inácio Lula da Silva e substituído por Marco Aurélio Garcia.

A diretora de câmbio da AGK Corretora, Miriam Tavares, pondera que já era esperada uma cautela maior dos investidores com a proximidade da votação, em 1º de outubro. Pesquisas recentes apontam vitória de Lula já no primeiro turno.

"O que está pegando mais no quadro político é a preocupação com a governabilidade da eleição do Lula. Todos estávamos certos de que o Lula conseguiria articular bem com a oposição nos primeiros anos (do segundo mandato) para promover reformas, e isso agora fica um pouco mais preocupante", disse a executiva.

"Acho que os investidores devem ficar mais apreensivos até 1º de outubro e, se houver segundo turno, deve ocorrer um prolongamento e até um acirramento da disputa", afirmou.

(Com informações de Reuters e Valor Online)

The American economy

Slow road ahead

Oct 26th 2006 | WASHINGTON, DC
From The Economist print edition


America's long-term potential rate of growth is falling, perhaps to its lowest pace in over a century








Get article background

EVERYONE knows that America's economy is slowing. Thanks to the bursting of the housing bubble, overall GDP growth has fallen back sharply. The biggest short-term uncertainty for the world economy is whether American consumers stop spending and drag the country into recession. But beyond the business cycle, another slowdown has received scant attention. America's potential rate of growth—that is, the pace at which annual output can expand without pushing up inflation—is also falling. By some estimates, it could drop to 2.5% over the next few years, which would be the slowest pace in over a century.

If that happens, the consequences will be serious. Tax revenues will grow more slowly than expected. Monetary policy will become harder to manage: as the 1970s showed, inflation can get out of control if central bankers do not realise that an economy's speed limit has fallen. Financial markets will be disturbed as conventional wisdom adjusts from an assumption of 3-3.5% potential output growth, and investors downgrade their expectations.


Potential output is hard to estimate, let alone predict. That is because an economy's trend growth rate cannot be measured directly. It has to be inferred. Over the long run economic growth depends on two things: increases in the supply and productivity of labour. The growth of labour supply, in turn, depends on the growth of the working-age population, the proportion of people who work and the number of hours they put in. The pace of productivity growth depends on capital investment, improvements in business processes and technological innovation. By looking at such trends, economists can estimate future potential output.

Although it generates precise-looking forecasts, this kind of “growth accounting” is fraught with difficulty. Both labour supply and productivity growth bounce around during business cycles. The share of people willing to work may fall in a recession, for instance, as discouraged people temporarily drop out of the workforce. Once job prospects pick up, they might return. Productivity growth is usually higher at the beginning of an expansion than at its end as firms work their existing employees harder before hiring new people. As a result, potential output can temporarily diverge from its underlying trends, making it even harder to estimate.

Nonetheless, the broad post-war history of America's underlying growth rate is clear. In the 1960s potential output accelerated to around 4% a year, largely because more women got jobs. In the early 1970s, for reasons that are still ill-understood, productivity growth slowed sharply, pulling down the trend rate of growth. Between the mid-1970s and mid-1990s America's economic speed limit was about 3%. Around half that growth came from an expanding workforce; the other half from productivity growth.






Thanks mainly to higher productivity growth, but also to a rise in the number of Americans working, trend growth rose suddenly in the mid-1990s. After the 2001 recession, productivity growth accelerated again, while the growth of labour supply slowed sharply. The share of working-age Americans in jobs fell after rising almost continuously for over four decades (see chart 1). This fall was widely interpreted as temporary, a sign that the recession was deeper than it appeared. But after five years of expansion, it has not been reversed, suggesting (although the evidence is still tentative) that structural changes are afoot. These labour-markets shifts are the main reason to be pessimistic about America's potential output growth.

So why is the proportion of Americans who work falling? For three reasons. First, the baby-boomers are heading towards retirement. The share of people aged between 55 and 64 has risen from 10.5% in 1995 to 13.3% in 2005 and is likely to reach over 16% by 2015. People over 55 tend to work much less than younger folk.

Second, the rush of women into the workplace has stopped. The proportion of women working rose from below 40% in 1960 to a peak of over 60% in 1999. It has subsequently fallen slightly.

Third, the rate of teenage employment has plunged. In the 1990s over 50% of young people aged 16-19 had jobs. Today just over 40% do, the biggest drop since records began. This decline is a bit of a mystery, since job growth in the kinds of industries that tend to employ young people—restaurants and shops—has been well above the national average. It may have happened because teenagers are staying at school or college longer, and are working less on the side. More education may mean higher future productivity, but in the medium term it cuts the number of available workers.

If economists at the Federal Reserve in Washington, DC, are right, these three components are likely to result in a bigger change than has hitherto been expected. A recent study* suggests that America's trend rate of labour-force participation could drop by a further 1.4 percentage points in the next four years, to just over 64%. By combining these projections with the Census Bureau's estimates for the growth in the working-age population, they calculate likely changes in the overall supply of workers. By 2010, the Fed economists reckon, labour supply in America will be rising by a mere 0.4% a year, well under half its current rate.



The geezer difference
These projections could be too gloomy. Washington's official number-crunchers, such as the Congressional Budget Office, predict that labour-force growth will slow down, but not that dramatically. An unexpected jump in what Dick Berner of Morgan Stanley calls the “geezer labour force” could make a difference as ageing baby-boomers work longer. Men in their 60s are already the fastest-growing segment of the workforce, although this has not made up for the overall decline.

A rise in immigration could increase the supply of labour, too, particularly since the proportion of immigrants who work is higher than that of native-born Americans. As the labour shortage begins to bite, the demand for immigrants should rise. But the politics of the issue argue against a big rise in the next few years. The government is under increasing pressure to crack down on employers who hire illegal workers, and Congress recently passed legislation to build a fence along a large stretch of the Mexican border.

It seems very likely, then, that America's labour supply will grow more slowly. And if that happens, potential output growth will too, unless productivity growth accelerates.

Unfortunately, the latest evidence suggests that, if anything, productivity growth is slowing unexpectedly. Over the past two years, in the non-farm business sector, it slowed to an annual average of 2% from an average of almost 4% in the previous three years.

And even that figure may be too high. The Bureau of Labour Statistics recently said 810,000 more jobs were created between March 2005 and March 2006 than they first thought. Thanks to those extra jobs the productivity figures for 2005 may be revised down by a further half of a percentage point. For the economy as a whole, the figure is some 0.3-0.5 percentage points lower than the official productivity figures suggest, because productivity growth in farming and government, which are left out of those figures, is even lower.

The longer the economy's expansion goes on, the slower productivity growth is bound to be. But the pace of the deceleration has begun to raise concerns. The small band of economists who study these things now agree that underlying productivity growth rose sharply in the late 1990s, from around 1.5% to some 2.8%. Three of those experts, Dale Jorgenson, of Harvard University, Kevin Stiroh, of the New York Fed and Mun Ho, also of Harvard, have calculated that over 60% of the late 1990s productivity surge was related to information technology. The industries that saw the biggest productivity gains were those that used IT most intensively.

The 2001-04 productivity surge is now the focus of an argument with big implications. Only 30% of that acceleration was related to IT, says Mr Jorgenson and his colleagues. Optimists take that as a good sign. It shows improvements in business processes spawned by the IT revolution are spreading through the broader economy. The economists reckon underlying business productivity growth is now around 2.5% (or around 2.2% in the overall economy). This is slower than in the late 1990s, but still far above historical averages.

Others are more worried. Robert Gordon, of Northwestern University, reckons that the post-2001 acceleration was the result of cost-cutting, not innovation. Other economists note that the pace of investment, particularly in IT, is much lower than it was in the 1990s. JPMorgan's calculations, for instance, show that firms' spending on IT equipment has grown by only 5.5% a year in this expansionary period, compared with over 20% a year in the late 1990s. Lower capital spending, they fear, could be a harbinger of slower productivity growth. Morgan Stanley's Mr Berner worries that high oil prices may also have hurt underlying productivity growth, by shifting the relative profitability of different sectors of the economy (much as the oil shocks of the 1970s did).






Mr Gordon sees the underlying rate of business productivity growth slowing to below 2.5% which, by his calculations, implies a rate of 2.1% for the overall economy. Coupled with the slowdown in labour supply, he concludes that America's potential growth rate could fall to 2.5%. Although their predictions for productivity and labour supply are different, JPMorgan's economists agree with his figure.

Mr Gordon's calculations suggest that 2.5% would be America's slowest economic speed limit in over a century (see chart 2). That is less surprising than it sounds. Though the statistics are less reliable for the years before 1950, it seems that in the early 20th century potential output grew rapidly thanks both to technological innovation and rapid immigration. Although actual output tumbled during the 1930s, America's potential growth rate did not. Some scholars argue that the 1930s were among the most technologically innovative years of the century.

Since no one foresaw the productivity revolution of the mid-1990s, these predictions could prove too pessimistic. The next “killer application” could be just around the corner. Even without rapid investment, the IT revolution may yield more productivity gains. But without some such happy chance, it looks as though America's potential growth rate is heading for a slowdown, at least for the next few years. The sooner that investors and policymakers wake up to this, the smoother the adjustment is likely to be.



* “The recent decline in the labour force participation rate and its implications for potential labour supply”, by Stephanie Aaronson, Bruce Fallick, Andrew Figura, Jonathan Pingle and William Wascher. Brookings Papers on Economic Activity, 2006:1

The Devaluationists
November 29, 2006; Page A18
The dollar's recent weakness against the euro and other currencies has brought out the usual suspects to blame the usual suspects. That is, the crowd that has long believed the greenback needs to be devalued because of the large U.S. trade deficit is declaring that day has finally arrived. The fact that the dollar has held up well for years despite the trade deficit doesn't seem to matter to this conventional wisdom.

Our view is simpler: When U.S. economic policies look like they might take a turn for the worse, dollar-denominated assets lose some of their allure. So, for example, when the new Democratic majority in Congress talks about raising taxes on capital gains and dividends, investors in U.S. financial and corporate assets get the jitters. And when U.S. monetary policy accommodates more inflation, investors also look for other places to put their marginal cash. Talk of a tax increase has certainly been in the news in recent weeks, and the jury is still out on the Federal Reserve's resolve to correct its inflationary easy-money blunder of 2003-2005.

On one issue we do agree with the trade-deficit devaluationists: The margin for error in American economic policy has been reduced. There are many more places, such as China and the former Eastern Europe, where high returns can be had. The euro has also emerged as a potential alternative as a reserve currency.

That's all the more reason for Treasury Secretary Hank Paulson to say, as he did yesterday, that a strong dollar is "clearly in our nation's interest." Federal Reserve Chairman Ben Bernanke also sounded the right note in saying that inflation remains too high and the Fed will be vigilant in seeing it fall. The dollar's fate is very much in our own hands.