Last week’s storm

BRAZIL ECONOMICS - Report 11 Jun 2018 by Affonso Pastore, Cristina Pinotti, Marcelo Gazzano and Caio Carbone

What was the cause of the storm that beset the Brazilian market last week? There was no single cause, but rather a series of causes. One was the abrupt, but not unexpected, end of an external bonanza period, characterized by low international interest rates and an abundance of foreign capital flowing to emerging countries. Brazil surfed on this wave, but the start of a cycle of appreciation of the dollar (and consequent fall in the capital flows to emerging countries) was sufficient to change investors’ optimism about the “benign international picture” and trigger crises in Argentina and Turkey, which have fragile balance of payment situations. But this is not the case of Brazil, which has a solid balance of payments. Brazil’s great fragility is its fiscal scenario and the risk (looming over the markets) that the dispute in the second round of the presidential race could be between two populist candidates without any commitment to the necessary reforms. Added to this is an inoperative government, to the point of being unable to avoid the costs of a truckers’ strike that decelerated the recovery even more and revealed political fragility even greater than imagined by the most pessimistic observers. The presidential succession picture is not defined – the campaign has not even officially started – but the situation described above has made the culture medium ideal for investors with leveraged positions to “declare” the final result of the election, prompting an extraordinary rush to obtain foreign exchange hedge, accentuated by the appreciation of the dollar and “bets” on higher interest rates, as happened in Argentina and Turkey. In face of the herd movement observed, the only possible reaction by the Central Bank was to increase the supply of currency swaps, in an attempt to smooth out the fluctuations of the real. Raising the interest rate would be a big mistake. The week ended with the markets calmer, but because of the adverse situations – national and international – the volatility will remain high.

Now read on...

Register to sample a report

Register
Sign-in
Forgot your password?
Copyright 2024 GlobalSource Partners. All rights reserved. This report is prepared for GlobalSource Partners’ clients and may not be redistributed, reproduced, stored in a retrieval system, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of GlobalSource Partners. This report is distributed simultaneously to our website and other portals used by GlobalSource Partners. The information herein was obtained from various sources and is believed to be reliable but GlobalSource Partners does not warrant its completeness or accuracy. Neither GlobalSource Partners nor any Country Analyst, officer or employee accepts any liability whatsoever for any direct, indirect or consequential damages or losses rising from any use of this report or its contents.