Email of the day on Brazil and a number of suggestions
Comment of the Day

December 11 2013

Commentary by Eoin Treacy

Email of the day on Brazil and a number of suggestions

“What are your thoughts on Brazil? Are things as bad as the market prices or is the decline overdone? What about the Real depreciation? Surely there are opportunities there?

“P.S. I can't find the USD/BRL chart as there is no menu item for currency cross rates and when I search for Real or Brasil or Brazil, nothing comes up for currency. Also, in the returns for general word search, it would be beneficial to show the dates of the returned articles as in the previous site.”

Eoin Treacy's view

Thank you for this question of general interest to subscribers. Let me first answer your Chart Library query. If you search for BRL in the Chart Library search you will find a considerable number of Brazilian Real cross rates. These are also included in the Major Currency Cross Rates section of the Chart Library which can be found via the menus.

Improving governance under former President Lula resulted in Brazil moving from being a serial problem debtor to becoming a creditor to the World Bank. Concurrently the Real doubled against the US Dollar which encouraged foreign investment in the stock market. The strength of the Real became a political liability from 2011 and currency controls were implemented.

As of this summer, some of these controls were removed but the Real continues to trend lower. Here is a chart of the Real shown inversely against the US Dollar. A clear progression of higher reaction lows by the US Dollar is evident and this would need to be broken to suggest a return to Real strength beyond the short term.

The increase in supply associated with funding the development of the Tupi oilfield has been a medium-term headwind for the market in addition to the Real’s weakness. Building expensive stadiums to host both the football World Cup and Olympics has also done little to ease supply bottlenecks in the economy. More recently, OGX’s travails have been a particular headwind for the wider market. However, since this share’s weighting in the overall Index has decreased substantially, the relative performance of other large shares is likely to be of more concern in future.

The Bovespa Index has held a progression of lower rally highs for nearly 2 years and has Type-3 top formation characteristics as taught at The Chart Seminar. A sustained move above 56,500 would be required to question the medium-term downward bias. 

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