BRAZILIAN REAL VALUED AT 2-YEAR HIGH AS COUNTRY RISK LOWERS
The Brazilian real reached a 2-year high of 3.06 per dollar this week
By plus55 on Feb 16, 2017
The belief that Brazil’s government will approve reforms to get its public accounts back on track has led to its best economic record since 2015. Not only is the Brazilian real at a 2-year high, but the country risk is back down to what it was May 2015. In the global investment quarter note published by PGIM this week, Brazil made the list of favorite currencies and bonds.
Of course, the fall of the dollar isn’t just of Brazilian cause. Other emerging economies like Russia and South Africa also saw a valorization of their currencies. However, the ongoing changes in Brazilian economic policy and politics has given the country a new face for investors.
Indeed, investors have favored Temer’s takeover of the administration and his austerity measures. In addition to the federal spending cap, Temer’s administration also pushed through a controversial pension reform last year. These expensive social security accounts represent the heaviest domestic threat to Brazil’s stocks. Thus, Temer’s economic reforms have convinced investors that Brazil may be on the right track to righting its public debt.
Meanwhile, inflation is down to 5.35 percent and continues to decline. Last year, Brazil’s inflation was at 10 percent. Lower inflation rates mean lower interest rates, which is great news for stocks. And also explains how the iShares MSCM Brazil (EWZ) is up 15.44 percent this year, leading the BRICs.
In addition, the overall improvement in the global economy has helped reduce the perceived risk of emerging countries across the board.
The future of the dollarIn the short term, domestic and international trends could bring the dollar to 3 BRL or lower. However, in the medium term, the U.S. interest rates will likely raise the dollar to 3.40 BRL. But of course, the risks posed by the arrival of President Donald Trump may negatively impact emerging countries beyond its Mexican neighbor.
The Brazilian industry has complained about the devalorization of the dollar due to the difficulty of maintaining exports. Brazilian businessmen have attributed the fall of the dollar to high tax interest, today 13 percent annually. The interest rate allows foreign investors to bring outside money in at a loss to the local market. Hopefully, as inflation lowers, so will the interest rates.
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