For much of this year, the Brazilian real has been one of the world’s worst-performing currencies. That largely served Brasilia well: it wanted a weaker real to help boost the slowing Brazilian economy. Lately, though, the real has been clawing back lost ground; during the first half of August, it even outperformed its Latin American peers.
But this week the central bank decided it had had enough. After a lengthy market absence, it intervened on Tuesday to stop the currency from strengthening further. The magic number it seemed to be defending? About 2 reals to the dollar.
“We currently see the 2.00 “big figure” as the government’s “line in the sand”, to be vigorously defended,” as Nomura put it.

That “big figure” is far weaker than the 1.53 peak that the real reached in July 2011. But it still leaves the real among the world’s most over-valued currencies. JP Morgan reckons the currency remains about 16 per cent over-valued in real terms. In July, the IMF similarly calculated the real to be 13 to 20 per cent overvalued. Nonetheless it seems the authorities judge the magic 2 level to be strong enough to contain inflation, but weak enough to stimulate exports. What chance it will stay there?

With some $350bn of foreign reserves, the central bank has a lot of firepower to sway the market this way or that. But intervention can only smooth a trend, not change it. Nor can it do much to alter the fundamentals that determine exchange rates – such as productivity, terms of trade and interest rate differentials. At the moment, these forces seem to be balancing each other out.

If the billions of dollars of infrastructure investments that president Dilma Rousseff announced last week come off, then that would boost Brazilian productivity – and tend to strengthen the real. But, at the same, the weakening world economy is sapping commodity prices, thus Brazil’s terms of trade, and therefore also the real.

As for interest rate differentials, the Brazilian central bank has cut interest rates to a record low of 8 per cent – and the market expects them to stay around there for a while.

The upshot, then, is that the real could hover around 2 to the dollar for sometime yet. Certainly most investors think that to be the case, according to the latest central bank survey. Two, it seems, is the magic number.