When Brazil joins the discussion, then it must be …

Key News

  • Greece started talks with EU and International Monetary Fund officials on Wednesday to hammer out details of an economic plan that could offer the euro zone member 40-45 billion euros to exit a debt crisis. (Reuters)
  • The number of Britons claiming unemployment benefit fell three times faster than expected in March, official data showed on Wednesday, but a broader measure of unemployment painted a less rosy picture. The pound rose by a fifth of a cent against the dollar after the figures, which reinforced hopes that first quarter GDP data on Friday will show Britain’s recovery is gaining traction. (Reuters)

Quotable – On Greek debt

“There are some distortions in world markets, one of them is a lack of growth and another is China.”

                           Henrique Meirelles

FX Trading – When Brazil joins the discussion, then it must be …

Gradually put in place a managed floating exchange rate system.

Apparently that’s what Chinese President Hu Jintao said in a speech at a BRIC summit last week. Smooth, huh?

It almost sounds as if maybe China wants to loosen the reins on the yuan; but it’s more likely China wants to loosen the pressure of the international collection of hands wringing its neck to let the yuan appreciate.

Sure, we know the US has its hand on China’s neck, more or less. (President Barack Obama has set the goal of doubling US exports in the next five years. And that isn’t going to happen without a stronger yuan and “freer” trade.) And there have been plenty of other key countries who also believe the yuan needs to be revalued higher. But where does Brazil stand?

Brazil may have talked about the yuan before, and probably has, but today is the first time I noted such. Both Brazil’s Finance Minister and central bank chief think a stronger yuan is critical in maintaining a balanced global economy.

Why is Brazil’s view on the yuan worth discussing? Brazil is a country seemingly more neutral on the geopolitical landscape. If anything, they have been leaning toward China because of the trade dynamic between the two players.

So why is Brazil concerned? Haven’t things been going smoothly for them? I mean, Brazil’s not trying to “let the yuan’s exchange rate issue become the scapegoat” of their domestic economic problems, right?

Nope. Brazil’s seems pretty content and mostly stable when it comes to the make-up of their economy.

So then what is it?

Maybe the answer lies in Brazil’s exports to the United States.

The total value of Brazil’s exports to the US currently stands at HALF the value it did before things came crashing down in 2008. Needless to say, the recovery in this figure has been small.

And maybe Brazil figures they can’t bet on much resurgence in this number, considering the state of finances in the fine States, private and public.

Sure, last year China overtook the US to become Brazil’s largest trading partner. And while that helped to keep Brazil’s economy stable during the world recession, it’s not currently enough to replace the drop in exports to the US.

Brazil Exports Index – Foreign Trade/Exports Total

A stronger yuan would make Brazilian exports appear cheaper, more attractive. Even though Brazil’s exports only account for roughly 10.5% of GDP, Brazil understands the potential of future Chinese demand.

From a long-term perspective, Brazil seems to want two things: a go-to customer for its exports and a stable business partner. A stronger yuan goes to solidifying that long-term goal.