Brazil Currency Outlook
A film released last month called ‘Lula: the son of Brazil’, a biopic of the president, is one of the most expensive ever produced in the country. Unfortunately, Brazilians are staying away from what they perceive to be political propaganda. The film has earned just a fifth of the box office receipts pulled in by ‘Alvin and the Chipmunks; the Squeakwell’. But there is firmer support for Lula from Pacific Investment Management Co (Pimco) the world’s biggest bond fund. It is stocking up on Brazilian bonds because it has ‘every comfort that the policy in Brazil will remain sound’. Pimco made a killing eight years ago by buying Brazilian debt when the rest of the world was selling, so its judgment cannot be ignored.
That is not to say that the real is a screaming buy. After a world-leading performance in 2009 the Brazilian currency has been in consolidation mode for the last three months and is off its highs against the US dollar and the pound. Its fortunes have been constrained not only by a feeling that it had strengthened too far, too quickly, but also by a global caution among investors.
That caution has arisen for several reasons, most of which relate to the strength – or otherwise – of the global economic recovery. In Europe, gross domestic product growth was weaker than initially thought in the fourth quarter of last year. Now, there are worries that Greece’s budget problems will contaminate Spain and Portugal, dragging down the economy of the euro zone as a whole. In China, one of Brazil’s biggest customers, the central bank has been taking steps to cool the pace of economic growth. The market fears that if it is too successful it will reduce demand for the output of commodity-producing and emerging market countries, including Brazil.
Those concerns about Greece and the euro have provided a back-handed compliment to the pound, distracting attention from the budgetary and political problems in Britain. Among other things, the Greek situation has highlighted the difference between a country in charge of its own financial destiny and one constrained by outside influences. Greece must live with the interest rates set by the European Central Bank in Frankfurt; Britain can set its own, according to its changing needs. Greece is stuck with the value of the euro because has no power to print its own money; Britain can print as many pounds as it sees fit and has done exactly that with its £200 billion programme of quantitative easing. Greek political parties have widely differing attitudes to public spending; the three major UK parties all agree that the budget gap needs to be narrowed (even if they differ in their approach to how exactly that might be achieved). Britain’s position as sick man of Europe has been usurped by Greece and, by derivation, Portugal and Spain.
Whilst that does not amount to a get-out-of-jail-free card it has taken away some of the downward pressure on the pound. Even so, it makes no difference to the risk management strategy for Brits planning to invest in Brazilian real estate. There is still no certainty that the sterling/real exchange rate will move in any particular direction so cautious investors should continue to hedge their exposure, buying forward 50% of the reais they will need.
