The Real Is Cut Loose

Brazil's decision to let its currency float apparently comes after the U.S. and the IMF failed to support Brazil's measures to control depreciation of the real. Brazil has lost about half of its reserves in the past five months trying to defend a level for the real that most economists and observers regard as overvalued. Ironically, even though the decision to allow the currency to float may lead to a larger decline in the real, Brazilian asset markets will likely recover as bargain-hunters step in.

The S&P 500 futures on Globex initially fell on the news, but then sharply recovered. Capital markets in Latin America will also likely slowly recover. The focus will likely be on Argentina, which has extensive trade relations with Brazil. The odds continue to favor the perseverance of the Argentine currency board.

This continues to be the dominant issue in the global capital markets. Capital outflow from Brazil appeared to increase yesterday from Wednesday when the exchange rate regime was adjusted. Preliminary reports suggest almost $1.3 billion left the Brazilian real yesterday via the commercial foreign exchange market. This compares to $864 million fleeing on Wednesday. Flight via the floating market -- mostly tourists and individuals -- is not yet available, but early estimates placed the figure at around another $300 million. ...