Brazilian equities are resilient today, even though the country is a major commodity exporter to China where weak July trade data are making some investors nervous.
The iShares MSCI Brazil Capped exchange-traded fund (EWZ) is up 0.5% today. Among the ETF’s top holdings, financial Itau Unibanco (ITUB), beverage giant Ambev (ABEV) and state-controlled oil producer Petroleo Brasileiro (PBR) moved higher Tuesday, while Banco Bradesco (BBDO) shares moved lower.
BNP Paribas Latin America Economist Marcelo Carvalho thinks the U.S. dollar has peaked, and he is bullish on Brazil and emerging markets. He explains:
“Commodity prices should gain support from three aspects of a weaker U.S. dollar (USD). First is the direct valuation effect, as commodity prices are quoted in USD terms. Second is the “financialisation” of commodities: as commodity futures have evolved into a financial asset class, the link between prices and the financial transmission channel has become crucial. A weaker USD should be very good news for EM for many reasons. First, if the USD weakens against all other currencies, then it follows that EM currencies would appreciate against the USD. Second, a weaker dollar tends to spur international capital flows to EM. Third, strong empirical evidence suggests that a weaker USD boosts commodity prices …
because the Chinese currency is a “pseudo peg” against the USD, a weaker USD means a weaker RMB too, against a basket of other currencies. A weaker RMB would tend to be expansionary for the Chinese economy. China is a major global consumer and importer of commodities, and commodity prices tend to rise with increased Chinese demand …
Today, July trade data from China looked weak. But one month does not necessarily mean a trend. Carvalho writes:
“… In Brazil, a strong correlation exists between the real and Brazil’s terms of trade – or the ratio between (commodity-driven) export prices and import prices. Commodity prices matter for our FX valuation estimates in Latin America, as they are relevant for current account developments. Global prospects reinforce our long-held, high-confidence, out-of-consensus view that the Brazilian real (BRL) will be much stronger in 2017 than markets anticipate. We forecast the BRL at 3.0 at the end of this year. A stronger BRL would also reinforce our high-conviction, long-held view that domestic interest rates will fall to 7.0%, well below what markets and consensus have expected …”
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