80.2K

Verified Solution

Link Copied!

In early 2011 Brazil's economy was flourishing in many dimensions, except for a significant and worsening trade deficit with China.The root of the problem was the increasing value of the Brazilian currency (the Real) which had increased by 10% over the Chinese currency (the Yuan) over the prior year.The increased value of the Real meant that Chinese imports were relatively cheap and Brazilian exports were relatively expensive, in currency fluctuation terms, and thus the trade deficit.An analysis of the matter identified the relatively high Brazilian interest rates (at almost 11%, these drew foreign investment in the Real, to earn the high interest rates), and because of the Chinese government's ongoing efforts to keep the value of the Yuan stable versus other currencies.

In contrast to the above scenario, thevalue of the real fell 120% relative to the yuan from January 2012 toJanuary 2016.From January 2016 through to the time of this writing (June 2017), the real has risen approximately 30% from its low in January 2016. But the real is still at historical lows. Some say the real was overvalued and the reduction helped to get the currency exchange back into balance. Others say the reduction in value was due to capital outflows from Brazil and a loss of confidence in the country's economy.

Briefly explain how you would expect the currency fluctuation issues facing Brazil to affect the value chains of Brazilian companies.

Answer & Explanation Solved by verified expert

See Answer