Brazilian Real's Outperformance Demonstrates Trader Pragmatism
Comment of the Day

November 05 2020

Commentary by Eoin Treacy

Brazilian Real's Outperformance Demonstrates Trader Pragmatism

This article by Davison Santana for Bloomberg may be of interest to subscribers. Here it is in full:

The Brazilian real’s outperformance hints at investors’ pragmatic stance toward the currency, which may have further room to appreciate despite potential diplomatic frictions with a Biden White House.

BRL rose 3.2% over the last two sessions, by far the best performance among all major currencies. That may sound strange given Joe Biden’s comments on potential sanctions on the country due to deforestation and Brazilian President Jair Bolsonaro’s clear alliance with Trump, but traders are working with the information they have at hand now instead of making assumptions about what will happen in the future.

A Biden presidency improves chances of stimulus in the near future even with a GOP-controlled Senate. That has prompted bets that the dollar is prone to weaken and the currency that seems to have most room for a quick swing is the Brazilian real. The currency is the most depreciated major currency in the world this year, even after this week’s gains. Brazil faces fiscal pressure with debt-to-GDP ratio expected to rise beyond 100% this year, but the fundamental issues are local and not external. With more dollars available, the temptation to bet on the recovery of a country that has shown robust activity data is just too high.

Investors will keep a close eye on Brazil’s budget challenges and the government’s maneuvers to finance itself. Concern about Brazil’s relationship with U.S. under a potential Biden government may grow in relevance, but only in the middle of next year.

Eoin Treacy's view

The determination of governments everywhere to spur reflation in 2021 is probably a more significant factor than geopolitics for most commodity producers. Australia’s brewing dispute with China is an obvious counter example, but even then, China still needs what Australia exports. Global infrastructure development is likely to play a vital role in the plans of most countries to boost employment and stimulate growth. That’s a major commodity demand growth trend which is taking place against a background of meagre investments in additional supply.  

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