Brazil Ignores Trump’s Tariff After Currency Complaints

Right back from Thanksgiving in Afghanistan and Tariff Man is reinstating tariffs on Brazilian (and Argentinian) steel after nearly a yearlong exemption. Trump said both countries were manipulating their currencies to make their exports cheaper.

Brazil’s real defied Trump’s threat and strengthened a bit to R$4.22 following Friday’s close of R$4.23. Two of Brazil’s largest steel companies, Gerdau (GGB) and National Steel (SID) were up around 1% in the early morning trading.

One explanation for the rise is that Trump also used his swipe at Brazil to go after the Federal Reserve for not being dovish enough. Trump believes the dollar bull market is due in large part to high U.S. interest rates compared to Europe. But rates at the European Central bank are zero. So when Trump asks for lower rates, Wall Street thinks real rates in the U.S. are going to zero, or negative. In theory, that is supposed to make equities more interesting even though the S&P 500 opened weaker. Brazil may be benefiting from the prospect of a weaker dollar this morning, instead of selling on tariff news.

Brazil’s President Jair Bolsonaro said he would talk to his economy minister before reacting. “If needed, I can also talk to Trump, I have an open channel with him,” Bloomberg reported him saying this morning.

The Brazilian real has been trading over R$4 to the dollar since August. It is now at its weakest level in more than five years.

Brazil’s real is a free-floating currency. Its value fluctuates with the market. The Brazilian central bank will at times purchase reals in order to take them out of the market and make the currency stronger. It will also do the reverse. However, Brazil has never been called a currency manipulator, so Trump calling them out on Monday is a first.

It is not entirely clear why the real has weakened so much in the last four months.

There are a few explanations, each being more realistic than the central bank conducting a competitive devaluation against the dollar.

Brazil’s interest rates are falling. That means bond yields are lower. Many Brazilians and international investors could be dumping real-priced debt as yields look less attractive.

Foreign investors have been selling Brazil securities since the passing of pension reform, so dollar inflows into the country could also have something to do with the weaker currency.

Last month’s release of ex-president Luiz Inacio Lula da Silva could have spooked domestic investors, but this is a less likely scenario as Wall Street is not worried about Lula.

In an interview on FOX Business Network’s “Varney & Co.,” Commerce Secretary Wilbur Ross’s comment on the matter suggested he was not fully filled in on the reason for raising tariffs. He also did not seem convinced that Brazil was a currency manipulator, instead switching to discuss China shortly afterwards.

“I believe what the president was concerned about was the deterioration in the Brazilian currency —  and that’s a fair factor to take into account,” he said. “The lower their currency, the cheaper their products coming in — he felt he had to do something.” 

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