Brazil steps up fight against rising real

Brazil’s currency warriors are at it again.

But the country’s latest assault on the real, which hit a 12-year high against the dollar earlier this month, is definitely one of the more obscure. Brazil’s policymakers said late on Friday they will force local banks to put the equivalent of 60 per cent of their short dollar positions in non-interest bearing deposits with the central bank.

The rule will now apply to banks with positions that exceed $1bn or that are bigger than their own capital base. It used to apply to positions over $3bn.

In short, it should make it so expensive to take big bets on the real that it would effectively limit banks’ positions, helping to curb the currency’s appreciation. Looking at the central bank’s recent data, you could have seen this one coming.

Despite constant threats from Brazil’s currency vigilante, finance minister Guido Mantega, investors have continued to get more bullish on the real. Short dollar (long real) positions between Brazil’s banks totaled $14.7bn in June – the second-highest position on record.

When the central bank first introduced this regulation in January (but gave banks a bigger allowance of $3bn), positions immediately started falling even though the rule did not take effect until April.

From February to March, short dollar positions dropped from $12.7bn to $8.8bn – the lowest for almost a year. However, positions have started creeping up again as traders have tried to outsmart the central bank and fight back.

Some analysts suspect that Brazil’s big banks have been making deals with the smaller banks to carry some of their positions after they have used up their own allowances. Now that’s what you call ‘jeitinho’ – a popular Brazilian expression for finding a way to circumvent rules.

Friday’s announcement of a smaller allowance of $1bn should come as a blow to these banks, which may have to unwind as much as $5bn of short dollar positions to comply with the new requirements. However, the central bank’s latest assault is unlikely to keep the real down for long.

Brazil’s 12.25 per cent interest rate is one of the highest in the world and the country is also expecting billions of dollars of investment over the next few years as it floats new companies, improves infrastructure, and prepares to host the World Cup and the Olympics.

Even the technical whiz kids at the central bank can’t do much about that.