Analysts at Nomura note that 2016’s improvements in economic policy and better political coordination provided Brazil with a significant market opportunity.
Key Quotes
“As most of that improvement has been already realised, 2017 is likely to be more challenging as there should be less positive surprises/further improvement on the agenda. While most of those economic/political milestones were helped by the start and ongoing approval of structural reforms and fiscal consolidation, the real test will be if this virtuous cycle turns into faster and sustainable growth.”
“In our view, significant further BRL strength could be derived from: a) faster progress on fiscal consolidation that leads to faster growth or b) from an eventual significant drop in political noise from the current administration. Currently, we believe neither outcome is immediately possible. Similar to Mexico, a 2018 Presidential transition could see slow moving agreements in the local political arena. Despite this, there are still a few positive factors that could support BRL including:
1) Brazil having a relatively low degree of trade openness in comparison with its other regional peers. This may help Brazil transit through a higher US rate environment.
2) Brazil is also not as exposed to the US as Mexico and it is not viewed as a “target” of negotiations for better “trade deals.” However, it is exposed to China (its main trading partner), and our Nomura chief China economist expects headline China GDP growth to remain stable at around 6.5-6.6% from Q1 to Q3 2017.
3) High carry has also helped BRL outperform other more “trade exposed” loweryielding regional currencies. Even as the easing cycle unfolds, Nomura economics still expects the Selic rate to end the year at 10% p.a. In addition, Brazil still has a low stock of government debt denominated in USD, at around 3% of total liabilities.”
“If the global backdrop allows, we believe BRL may still outperform its other regional peers because of relative fundamentals and still significantly high carry. Despite this, we see a slow pace of appreciation, as Banco Central do Brasil (BCB) still needs to dismantle its current FX swaps programme, where the central bank is exposed to BRL weakness from a monetary and fiscal perspective.”
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended content
Editors’ Picks
EUR/USD edges lower toward 1.0700 post-US PCE
EUR/USD stays under modest bearish pressure but manages to hold above 1.0700 in the American session on Friday. The US Dollar (USD) gathers strength against its rivals after the stronger-than-forecast PCE inflation data, not allowing the pair to gain traction.
GBP/USD retreats to 1.2500 on renewed USD strength
GBP/USD lost its traction and turned negative on the day near 1.2500. Following the stronger-than-expected PCE inflation readings from the US, the USD stays resilient and makes it difficult for the pair to gather recovery momentum.
Gold struggles to hold above $2,350 following US inflation
Gold turned south and declined toward $2,340, erasing a large portion of its daily gains, as the USD benefited from PCE inflation data. The benchmark 10-year US yield, however, stays in negative territory and helps XAU/USD limit its losses.
Bitcoin Weekly Forecast: BTC’s next breakout could propel it to $80,000 Premium
Bitcoin’s recent price consolidation could be nearing its end as technical indicators and on-chain metrics suggest a potential upward breakout. However, this move would not be straightforward and could punish impatient investors.
Week ahead – Hawkish risk as Fed and NFP on tap, Eurozone data eyed too
Fed meets on Wednesday as US inflation stays elevated. Will Friday’s jobs report bring relief or more angst for the markets? Eurozone flash GDP and CPI numbers in focus for the Euro.