Brazil will report its February nominal and primary budget balances today. Although this report typically does not move the Brazilian market, there is a risk that it will do so today by disappointing investors.Yesterday, it was reported that the central government ran a 1.09 billion Brazilian real (BRL) deficit compared with expectations for a 1.23 billion real surplus. In its updated economic forecasts, the government is forecasting CPI this year at 4.9% and next year at 4.5%. The central bank updated its forecasts and has inflation at 5.2% this year and 4.9% next year. The midpoint of the central bank target is 4.5%. The fact that inflation is forecast at such elevated levels may mean that central bank will be more aggressive than previously thought in tightening monetary policy. Already there seems to be an increase in forecasts for the central bank to hike rates 75 basis points at its next policy meeting (April 27-28). And such expectations have been underscored by the central bank's assessment of a "steep" reduction in the output gap. Separately, Standard & Poor's reaffirmed the country's BBB- foreign currency debt rating -- though the ratings agency did appear to hold out the possibility of an upgrade if growth is "stable and sustained." The combination of this news stream, coupled with the pullback in the dollar, today is helping push Brazil's currency to its best levels in a week. Tomorrow is the beginning of the new fiscal year in Japan, and it would not be surprising to see renewed interest in Brazilian fixed-income products by Japanese investors. The dollar is vulnerable to further strength in the Brazilian real. The potential extends to BRL1.75 in the coming week or so. Although there is much talk of Henrique Meirelles stepping down from the central bank to re-enter politics, President Lula asked him to say on. Meirelles is expected to announce his decision today. Regardless of what he decides, the central bank is about to begin a new tightening cycle. That will also make it somewhat less anxious about strength in the nation's currency. Elsewhere, Mexico is featured in a Financial Times story that plays up positive aspects of the country's economy. The government recognizes these trends and has revised GDP up a few times already this year to 3.9% and has hinted that it may be hiked up again in the coming weeks. The Bolsa, which is up only 4% for the year, reached a new record high yesterday before slipping into the close.
For its part, the dollar recorded a new 17-month low against the Mexican peso yesterday. Although we have tended to be skeptical about the underlying strength of the peso, (concerned about the decline in oil output, the lack of much progress on broadening the tax base and the nation's ongoing security issues), the market is clearly more friendly toward the currency. The Commitment of Traders at the IMM shows net long speculative positions of more than 100,000, and this number looks poised to test the record high seen in Feb 2008 near 125,000 contracts. Meanwhile, a number of contacts have begun suggesting dollar potential toward 12.00-12.10 Mexican pesos, which represents about another 2% dollar decline. More immediately, look for resistance in the 9.38-9.42 Mexican peso area to contain upticks.