Brazil has put currency wars back on the global agenda. In 2010, the country’s Finance Minister Guido Mantega complained that unwanted foreign inflows were driving up the Brazilian real and he introduced measures to moderate the currency’s strength.
The emerging Latin American giant is once again trying to weaken its currency. The real has appreciated about 6 percent this year, according to Bloomberg.
And CNN reported that Mantega has repeatedly blamed rate cuts by central banks in the US, Europe and Japan for unleashing a “monetary tsunami”.
After news that economic growth fell last year to 2.7 percent from 7.5 percent in 2010, the authorities took action.
On Wednesday, the Brazilian central bank cut its benchmark Selic rate by 75 basis points to 9.75 percent, despite the fact that inflation was over 6 percent in January. The next day, the government extended the transaction tax on foreign borrowing, introduced in 2010. And it intervened in the market with its own transactions, designed to keep the currency down.
But, as the Financial Times noted the next day, the real actually strengthened about 0.3 percent to 1.71 reais to the dollar on Thursday.
Like Brazil, South Africa has started attracting stronger investment flows and the rand has done even better than the real. The currency, which ended last year at R8.1 to the dollar, traded at about R7.55 on Friday. In other words the rand, which on December 30 could buy 12.3 US cents, was worth 13.2 US cents last Friday – a 7 percent gain.
It will only be a matter of time before the weaken-the-rand brigade starts lobbying for intervention by the Reserve Bank and Treasury, as it did in earlier periods of rand strength.
Supporters argue that a weaker rand makes exports more profitable and boosts the manufacturing sector, thereby creating jobs. And, in 2010, they called for the exchange rate to be managed so as to to keep it between R8 and R10 to the dollar.
While there are short-term benefits, for exporters, of a weak rand, there is a cost to the country.
The main impact comes via the petrol price, which is adjusted each month to bring it into line with prices of a basket of imported oil products.
The price was hiked by 28c a litre last Wednesday to R11.23 a litre in Gauteng. And more increases are on their way; not only because another 28c will be slapped onto the price next month when fuel levies are hiked. The underlying pressure comes from the price of oil, which is up about 24 percent in the year.
The latest petrol price adjustment reflected the average daily under-recovery between January 27 and the end of last month. In that period, the price of benchmark Brent crude rose from $110 a barrel to $122.73. On Friday Brent traded at about $125. So, unless there is a sudden reversal in the pattern of oil prices, an under-recovery will continue to accumulate in the month ahead, even if the rand stays strong.
A sign of things to come is that the under-recovery on Thursday last week, the day after the price hike, was 28c a litre.
If the rand had not made gains this year, the rising oil price would have made even bigger inroads into our pockets. If the currency had weakened the damage would have been even worse.
Cosatu is usually in the vanguard of a campaign for a weaker currency. A point the labour federation should bear in mind is that manufacturing would also do better without constant crippling strikes.