Notes From Underground: The world gets “REAL”; Brazil Finance Minister says, “We are in a Currency War”

The Brazilian finance minister launched a barrage of words warning the Brazilian policy makers that they were, in fact, in a “currency war” as many nations around the world were seeking to depreciate their currencies to attain some type of competitive advantage against their competitors. The Japanese, Koreans, Chinese and others were doing all they could to hold their currency values down.

The most significant currency manipulator may well be the U.S. as the FED embarks on another round of QE. Several pundits today were trying to guess how much the Bernanke team was going to place into the liquidity pool by buying up al sorts of DEBT instruments. Some analysts were sure that the next round of QE would total $1.5 to 2 trillion more. At the end of the day, the WSJ’s Jon Hilsenrath wrote a story asserting the FED’s QE plan is to proceed in small increments rather than unleash one massive round of monetary injection. This story from the FED’s newest boy toy took the air out of the equity rally and put pressure on the commodity currencies. It is an interesting gambit by the FED to release this news to calm the markets as they were giddy with anticipation of the monetary fairies dancing in their heads.

So we now know that the FED will move slowly and with caution, waiting for the markets to relieve the need for the FED to act at all. We will watch for further action to determine if the markets are buying what the newest FED snitch is selling. More importantly, the global financial policy makers are going to have to address the problem of the U.S. embarking upon currency intervention through the backdoor. It is of more than passing interest that it was Brazil who warned of a currency war. It is truly Brazil that is the darling of the global financial community.

Last week’s PETROBRAS offering was snatched up as more upward pressure was brought to bear upon the REAL. If Brazil truly feels its currency is causing it a competitive problem it is time to cut interest rates, or follow the path of some Asian nations and place time restrictions on investments into the currency and equity markets. Hot money flows would stop if there was a financial penalty on early withdrawals. Regardless, the world has now been given another element to worry about.

The European mess was given an added dose of uncertainty as ECB PRESIDENT TRICHET joined the discussion about invoking monetary sanctions on EURO nations that violated the Maastricht budget requirements. Trichet was more than acerbic in demanding that sanctions be quite severe. The fact that not one nation presently meets the requirements did not prevent Trichet from putting forth five tests to assure compliance. Whether or not it is the right thing to do, the timing is wrong as the last thing Europe needs right now is more austerity. Currency  wars and austerity budgets while the world economy is so fragile makes us very nervous. Let us see what the markets do with these new shots fired.

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7 Responses to “Notes From Underground: The world gets “REAL”; Brazil Finance Minister says, “We are in a Currency War””

  1. Arthur Global Practice Says:

    In Europe everybody is talking about pressure on Ireland´s banks… there´s more risk coming from Greece or Ireland?

  2. yra Says:

    yes arthur there is–the question is when

  3. Arthur Global Practice Says:

    following with Europe/Greece… I find James Mackintosh´s thesis very interesting:

    http://www.ft.com/cms/s/0/2918d9fe-baef-11df-9e1d-00144feab49a.html

  4. yra Says:

    yes he wrote that piece very well –Mac kintosh is righ ton target but it shows how much fear is in the market

  5. Arthur Global Practice Says:

    Yes, I can smell the fear. Thank you for your time and thoughts.

  6. Ron Says:

    yra,

    I must admit, I am taking hard earned 401k’s conservative cash out of anything developed world, usd, eur, yen and buying things like Brazilian etfs bonds etc. QE2 seems to be stimulus, but not for the US, its for the emerging world who make the products… Its just resulting in devaluation of the USD in this effort to avoid deflation.

    Part of the 20 year trend you speak of of deflation of developed world wages coming to roost…

    Soon we may need visas to live and work in Brazil as the U.S. becomes Argentina lite… JUST JOKING. In all seriousness, the U.S. still has many years of credit I would say. But I dont have to own stagnant U.S. stocks

  7. yra Says:

    Ron yes and i enjoy your smart alec nature as it makes us comrades.But the EMG world is fraught with minefields so use the corrections to develope a longer term strategy.We will keep our eyes on Brazil to see how they respond to the strength of the REAL.See martin wolf in today’s FT

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