BRL: From carry to capital flows – Deutsche Bank

Sebastian A. Brown, Strategist at Deutsche Bank suggests that they expect FDI flows into Brazil, in particular, to remain strong and possibly strengthen if China delivers on signals it could invest USD20bn in Brazil in 2018.

Key Quotes

“Portfolio inflows have been lackluster (surprisingly so in fixed income), but it the upturn in the economy gains momentum we find foreign investors under allocated in local equities. In this case, and as monetary easing tends to attract inflows, we believe that BoP could take the baton from carry as a driver of BRL strength – even if carry – once adjusted by vols – remains attractive. Currency strength or stability would reduce demand for hedges and allow the CB to eliminate its “forward” position comfortably.”

“Funding remains a more difficult choice, in our view. We recommend long BRL/ CLP on the view that the CLP’s recent rally on the back of copper prices has is a temporary phenomenon while inflation and that a dovish BCCh could ease rates further unless the peso weakens. If EUR strength resumes into 2018 as we expect we believe USD/BRL could test 3.0 – which also bodes for short USD/BRL. More conservatively in the near term short EUR/USD could be an alternative – or just the middle ground of a basket of USD/EUR. We leave the EUR/USD call aside (again, assuming near-term USD strength retracing into 2018).”