FXstreet.com (Barcelona) - Iian Solot, Emerging Markets
Strategist at Brown Brothers Harriman believes that expectations
for the Brazilian real have swung again.
Now, the skew of observers is moving towards those who think that a
break below the USD/BRL 2.00 level is more likely than a break
above 2.10. He is sticking to his view that the 2.00 level will
hold for now, but he feels that the pair could undershoot a bit
before the government steps in, akin to the overshooting change in
thinking within the administration. He notes that any
interpretation of Brazil´s opaque economic policy making has a
short shelf line and should be taken with a grain of salt.
Solot notes that the level shift in USD/BRL to above 2.00 was
driven bythe view that Brazil can achieve a policy mix of (
A
) lower interest rates, (
B
) weaker currency, (
C
) Currency/Capital Controls, (
D
) tame inflation, and (
E
) solid growth (originally forecasted at 4% for 2012. He calls this
the "have your cake and eat it" part of the debate, personified by
Finance Minister Mantega and other ´Developmentalists´ - PM Dilma
included. He writes, "So, whatever happens, this view will continue
to determine the broad ideological outline of the current
administration´s macroeconomic policy.
However, he writes, "Mantega's views appear to be losing ground to
another line of thinking. Let us call it the "somethings got to
give" view. We presume this view is being advanced by a group of
economists at the helm of the central bank, including President
Tombini. It anticipates that, at the very least, the assumption on
inflation is unlikely to hold under these conditions. This view
gains even more traction in the context of the deteriorating fiscal
deficit due to greater spending and the recent negative
developments in the energy sector, as the lack of rain and proper
infrastructure planning may force a switch from hydro towards more
expensive thermo energy. In addition, this camp could also be
advocating the need to be nicer to financial markets if the
government wants to realize its investment goals and not embarrass
itself in the upcoming Would Cup and Olympics."
The evidence that the second camp has the upper hand (for now) is
twofold notes Solot. First, heavy artillery was used by both the
Finance Ministry and the central bank to defend BRL as it moved
above 2.10. Second, recent commentary points in this direction, in
particular the much discussed interview by Mantega late last week
in which he stated that 2013 will be a "calmer year, and with less
measures."
With everything said, Solot still assumes that this change in
direction was more of a reluctant compromise, or a truce, rather
than a deep ideological sea change. He writes, "Therefore we doubt
they will be willing to give so much ground as to let the 2.00
level go - if nothing else, as a matter of pride. We think USD/BRL
is still stuck between 2.00-2.10 and promises a relatively low
realized volatility going forward. As such, we still think long BRL
positions with a view towards carry offer a good risk reward for
medium-term investors. 1-month BRL implied yields are currently
near 5%, which remains above CLP, COP, and MXN (all clustered near
4%). With much of EM still cutting rates in 2013, the real's yield
advantage is likely to get even bigger since nominal rates have
likely bottomed in Brazil."