Brazilian Real Up 5.5% in 2012
NEW YORK (BBH FX Strategy) -- There is nothing like a 5.5% appreciation of BRL and the Bovespa topping major equity market returns so far this year to focus the mind on Brazil once again.
There were three developments in the last few days worth noting: (1) BACEN cuts as expected but the market seems to be reassessing expectations for cuts later this year; (2) local news wires are talking about further tax cuts coming soon to spur growth in the retail sector; and (3) Finance Minister Mantega is once again talking about measures to stem appreciation of the BRL.
The Brazilian central bank cut rates by 50 basis points to 10.50% as widely expected, keeping the language of the statement unchanged. This suggests that the pace of cuts should remain at 50 basis point rate per meeting for now.
More interestingly, however, markets seem to be reassessing the total amount of SELIC cuts this year. Many local analysts are still calling for rates to fall to 9%. After bottoming out at 9.63% in early December, local swap rates expiring in January 2013 rose 55 basis points to as high as 10.18%, but have since fallen back to 9.88%.Implied rates in the futures markets are currently pricing a SELIC trough at around 9.75%. But as a result of the recent volatility in local markets, this number has shifted from close to 9.25% to close to 10.0% in recent weeks. We stick with our base case for SELIC at 9.50% for the bottom of the cycle. The next meeting is March 6 and 7, and we should expect another 50 basis point cut to 10% and see how the central bank's language develops. Part of the reason for the volatility in local rates is the lack of visibility about what growth stimulating measures the government has in store. The latest headlines by the local media suggest that the government is considering a further cut of 0.5% to the tax (IOF) on consumer credit. The government reduced this tax from 3.0% to 2.5% late last year. As we have already noted, President Dilma's government will continue to act along with the central bank by taking measures to spur growth and control the currency.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV