Must-know: What option does Brazil have?

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Increase competitiveness of its non-commodity exports

We’ve discussed why it’s a good time for Brazil to focus on improving its competitiveness in non-commodity exports. However, a depreciating currency could increase Brazil’s inflation more. Inflation is already hovering above the official target ceiling of 6.5%. The country needs to find ways to improve the competitiveness of its goods in the global and domestic markets. It also needs to control inflation.

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The performance of the iShares MSCI Brazil Capped ETF (EWZ) serves as a good gauge of the Brazilian stock markets—much like the WisdomTree India Earnings Fund (EPI) for India, the VanEck Vectors Russia ETF (RSX) for Russia, or the SPDR S&P 500 ETF (SPY) and the iShares S&P 500 Index (IVV) for the U.S.

BRL USD exchange rate

Prevent China from gaining market share

Although a depreciating currency helps improve the competitiveness of Brazilian products in the international and domestic markets, the flood of Chinese products into its territory is still a concern for Brazil. If China continues to flood the Brazilian markets with better products, Brazil could see unemployment levels increase more in the country.

Therefore, in order to protect its manufacturing sector, Brazil may use the World Trade Organization’s (or WTO) rules to impose anti-dumping measures against China for shipping exports through third countries.

Tame its mounting inflation

Currently, Brazil’s inflation is already above the 6.5% limit. Higher inflation tends to weaken the currency—the Brazilian real. Brazilian goods seem more expensive to foreigners. This reduces the demand for the real. This causes currency depreciation for the real. So, higher inflation tends to stoke higher currency depreciation.

The real is already following a depreciating trend. Currently, the country’s main task is to use its monetary policy tools to bring inflation back to desired levels.

In the next part of the series, we’ll discuss the recent hawkish move that was made by Brazil’s central bank on the benchmark Selic rate—a first since Dilma Rousseff was re-elected as the President of Brazil on October 26.

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