BRL Fundamental Analysis 10 July 2009

By: William Doody 
The Brazilian Real has appreciated substantially over the past several years as the strength in commodities brought meaningful strength to the country’s economy. Brazilian central bankers have kept interest rates at relatively high levels, making the currency even more appealing to foreign investors. Since mid-2004, the Real has strengthened by over 35%, even after a substantial setback at the height of last Autumn’s credit crisis. In recent weeks, the Real has again been strengthening, as data begins to show proof of an economic recovery in China, one of the most important end-markets for the country’s commodity producers. For the first time in several months, the Real is again trading at less than 2 BRL per U.S. Dollar. 

Looking forward, we expect the relative strength of the Real to continue. In recent weeks, the county’s credit rating has been raised by S&P, commodity prices have shown signs of stabilizing, and economic data has continued to point towards recovery. Brazil’s economy has been less affected than others by the past year’s crisis and should be one of the first to move higher as the global recession begins to fade. We would continue to be buyers of the Real, especially against the British Pound and the Euro. Another interesting trade which should be considered is a pair trade with the Mexican Peso. Mexico’s economy is closely linked to the U.S. economy and thus is almost certain to lag Brazil moving towards recovery. Similarly, last week’s election results created a divided government in Mexico in which the legislative branch is now controlled by the opposition party to President Felipe Calderon. This is certain to slow the pace of any economic legislation in Mexico and should further weaken the Peso. We would buy the Real and sell the Peso.
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