September 22, 2015
By Oanda
“Brazil’s currency the Real (BRL) is under attack from all fronts,” says Alfonso Esparza, Senior Currency Strategist for OANDA in Toronto. “After hosting the world cup and soon to host the Olympics, social unrest was triggered after the once shining example of the emerging markets has come crashing down.”
“The BRL has touched thirteen year lows and even central bank intervention has not mitigated the fall of the currency,” he added.
Brazil’s top exports have been shrinking in the face of a slowdown of the Chinese economy. Political strife and corruption has angered the population.
Esparza observed that, “Several analysts expected emerging markets to get a reprieve after the Federal Reserve held rates unchanged last week, but the fact remains that the U.S. economy is still in the lead to be the first to raise rates.”
He reiterated that the “Brazilian economic fundamentals are weak and are reflected in the currency. Emerging markets that have averted the fall in commodity prices, such as India have benefited from low priced imports. Brazil on the other hand has seen its top exports priced down across the board with demand unlikely to pick up in the short term.”
Esparza says that the 3 major factors affecting the Brazil economy from abroad are: “Federal Reserve rate hike expectation, the Chinese economic slowdown and the battle with deflation in European.”
Domestically, he says that Brazil is facing decay of its economic fundamentals, as well as an impeachment process that is gaining steam and social unrest. “Investment has exited Brazil creating demand for the U.S. dollar as investors liquidate Real denominated assets and flooding the marketing with the currency.”
Looking ahead, Esparza xpects that “Brazil will get limited chances to change investors minds as emerging markets will continue to be under pressure from macro headwinds and the political and social problems will not be solved in the short term.”
Commentary provided by Oanda
