Brazilian Real Currency Report - Research Paper Example

The objective of this paper is to shed some light on the key factors affecting the behavior (in terms of appreciation) of the real, and specifically to evaluate the extent to which the expanding size of Brazil’s oil sector in the economy has influenced the explanation of these events. Oil production in Brazil has been growing strongly since the turn of the millennium. A variety of energy policies which brought competition in the oil market and abolished subsidies to price controls and imports has supported these developments.

This is despite the fact that the industry is still dominated by Petrobas, the state-owned corporation (Kumar 25). Going forward, Brazil’s economy is likely to become increasingly dependent on oil production, particularly of offshore oil, for both local use and export (Guimara?es 19). Petrobas discovered huge oil reserves that have been estimated to have the capability to double the country’s current reserves, propelling the country to among the top 10 countries with respect to oil reserves alone.

Oil developments have had a significant impact in explaining the movements of exchange rates, in addition to traditional factors. In a majority of equations, the productivity differential and net foreign assets have been found to be crucial determinants of the true effective exchange rate in the long-term (Kumar 47). Net foreign assets have also been found to be the factor affecting the most exchange-rate fluctuations in the short term. Oil production appears to be significant for movements in the real effective exchange rate in the long term.

The case is similar in the oil export and the two standards of the terms of trade. In the short term, however, these variables appear to have an insignificant, if not fairly limited impact (World Trade Press 44). Exchange Rate Regime Brazil has implemented a governed floating exchange rate regime. This means that the exchange rate is free-floating and can shift daily in line with the supply and demand in the market. If necessary, the Brazilian Central Bank can intervene in exchange rate. Interventions occur in 3 conditions: to manage extreme volatility that may affect the market’s normal functioning; to rectify monetary and localized instability in liquidity; and to grow foreign exchange rate reserves (Frieden & Stein 37).

Balance of Payments (BOP) Position The Central Bank of Brazil (CBB), via the Balance of Payments Division of its Economic Department, is tasked with responsible for compiling, monitoring, and analyzing Brazil's balance of payments data (Frieden & Stein 74). In addition to this, it publishes and disseminates this data. The primary sources of information for compiling the entries of balance of payments goods are reports from the Secretariat of Federal Revenue of the Ministry of Finance, the Foreign Trade Secretariat of the Ministry of Development, Foreign Trade, and Industry.

For other BOP transactions, the primary source is the exchange record a comprehensive statement of the exchange operations compiled by the Central Bank of Brazil’s Foreign Capital and Exchange Department and reported by the country’s banks. Brazil’s current BOP, in US dollars, is -52, 480,127,065 (Kumar 84). Purchasing Power Parity Brazil’s current purchasing power parity is $2.362 trillion (2012 estimates) (Guimara?es 59). Interest