Brazilian economy, one of the BRIC majors and the biggest
economy in South America, has been suffering from severe structural
problems including slowing growth, rising inflation (
in July 2013) and widespread socio-political issues for quite
While these alone pose tremendous concern, the real pain has
cropped up in the country's currency market. The performance of the
Brazilian currency - Real - has been downright painful for quite
some time (read:
Short Brazil with These Inverse ETFs
Inside the Real Weakness
The real already saw its biggest drop against the dollar in more
than four years in early July and is now approaching its five-year
low against the dollar. Quite expectedly, Brazilian real can now be
be called the emerging markets' worst performing currencies against
the U.S. dollar
depreciating more than 17%
in the first half of the year.
According to Reuters
, the latest reason for the plunge in emerging market currencies is
the possible tapering of the Fed's bond buying program which has
led to the strengthening of the US dollar, and caused a spike
in U.S. debt yields, thereby pushing up borrowing costs globally.
Emerging markets have to depend on cheap capital to finance their
huge current account shortfall. Consequently, these markets were
hurt by the reversal in capital flows, resulting in shap decline in
their currencies and stock markets.
, Brazil recorded a trade deficit of $3,953 million in June 2013
while it recorded the worst deficit level (between 1980 and so far
in 2013) only a few months ago - in January this year. In such an
import-centric scenario, an extremely weak currency is sure to take
a toll. Given its large current-account deficit, Brazil now needs
to magnetize sizeable inflows just to keep the real alive.
Central Bank Intervention
Continued fall in the real will make imports costlier and in turn
aggravate the country's inflation. On August 22, Brazilian central
in the currency market to provide $60 billion worth of cash and
insurance by the year end to spark the real's prospect and augment
liquidity. The measure is intended to serve triple targets of
taming inflation, arresting the real from further slide and setting
growth in motion. This currency intervention is likely to widen
45 billion strategy
adopted earlier in 2013.
Brazilian Central bank has
raised the Selic rate thrice
so far this year to curb inflation as well as strengthen currency,
but this in turn was hurting the country's growth profile. Brazil
recorded 0.9% GDP growth last year, after registering 2.7% growth
in 2011 and 7.5% in 2010.
Following the announcement, the real registered its
in almost two years, advancing 3.7% to 2.3488 per dollar (on August
23) and suggesting that the problem might take a breather in the
WisdomTree Brazilian Real Fund (
) - The only fund designed to deliver returns corresponding to the
money market rates in Brazil and appreciation of the Brazilian Real
relative to USD, plunged about 9.7% on August 23, but gained about
3.28% after the Central Bank's intervention. This fund provides
exposure to the movements of the Brazilian real against the U.S.
dollar. This ETF - charging 45 basis points a year - is not a very
Year-to-date, this product has lost around 10% thanks to reduced
demand for high-yielding but risky emerging markets currencies as
well as the sagging Brazilian economy. The product is presently
performing better ($16.98 as of August 23) than its 52-week low
level of $16.33 indicating that currency recovery still has a long
way to go. The product BZF currently has a Zacks ETF Rank of 3 or
If we look at the Brazilian stock market, the performance is even
worse with ultra popular
iShares MSCI Brazil (Free) Index Fund
Market Vectors Brazil Small-Cap ETF
iShares MSCI Brazil Small Cap Index Fund
) all plunging double digits in the year-to-date timeframe,
indicating further pains for the country (read:
The Comprehensive Guide to Brazil ETFs
). The funds EWZ, BRF and EWZS were beaten by a respective 21.7%,
28.8% and 28.1%.
A lot has been talked about currency woes lately across most of the
emerging nations with Brazil, India, Indonesia and Turkey leading
the list (read:
3 Currency ETFs Crushed in Emerging Market Rout
Brazil is not the only country where policy makers are trying and
testing measures to stabilize currencies, the remaining three are
also resorting to various initiatives. Among these, rate hike in
Turkey and increased import taxes on luxury goods in Indonesia are
to name a few. But these measures are yet to show any constructive
Turkey ETF Tumbles on Surprise Rate Hike
Given this, Brazilian central bank's effort to put such a large
volume of cash behind its sinking currency came as a pleasant
surprise. And even if the improving momentum doesn't hold well over
the longer term as the underlying causes of concerns remain intact,
investors should note that the step might bring only a short-term
Brazil ETFs Surge, But Can It Last?
The measure "should eliminate some of the uncertainty, and help the
[real] trade closer to its peers, but we don't believe it changes
the weakening trend of currency"
said Marcelo Salmon
, Barclays co-head of Latin America economics and strategy.
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MKT VEC-BRZL SC (BRF): ETF Research Reports
WISDMTR-BRZ RL (BZF): ETF Research Reports
ISHARS-BRAZIL (EWZ): ETF Research Reports
ISHARS-MS BR SC (EWZS): ETF Research Reports
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