17 Aug 2015
Political turmoil weighing on BRL – TDS
FXStreet (Edinburgh) - According to strategists at TD Securities, the Brazilian currency remains under pressure against a backdrop of rising political effervescence.
Key Quotes
“We got to the point that for investors to short BRL, they need a pretty good reason. Look at it this way, a 3-month short USDBRL position will cost you approximately 110bp of negative carry every single month and assuming that BRL doesn’t depreciate by 3.3% over the investment horizon, you’re making a loss. This suggests USDBRL must move above 3.60 in 3 months for you to make money. If you plan to hold the position for a year, USDBRL has to grind over 3.90 to make it financially viable”.
“Public anger to the economic mismanagement of Brazil has grown larger since Dilma’s re-election. Her popularity is at historical lows, at around 8%, and also the lowest level ever recorded for a president in Brazil. But mass protests are not enough. Impeachment talks continue but an impeachment procedure continues to be a lower-probability scenario for now, as many fellow PT MPs would also find themselves out of job if the government fell and early elections were triggered. Therefore, Dilma and the PT have no option but to restructure”.
“This means that a lot of what we already see, both politically and economically, is already priced in. In other words, we continue to like a more constructive view on Brazil, not because we like the economy – we don’t at all! – or political confusion, but just because the risk/reward balance is becoming attractive if Brazil can avoid the tail risk of a downgrade to junk”.
Key Quotes
“We got to the point that for investors to short BRL, they need a pretty good reason. Look at it this way, a 3-month short USDBRL position will cost you approximately 110bp of negative carry every single month and assuming that BRL doesn’t depreciate by 3.3% over the investment horizon, you’re making a loss. This suggests USDBRL must move above 3.60 in 3 months for you to make money. If you plan to hold the position for a year, USDBRL has to grind over 3.90 to make it financially viable”.
“Public anger to the economic mismanagement of Brazil has grown larger since Dilma’s re-election. Her popularity is at historical lows, at around 8%, and also the lowest level ever recorded for a president in Brazil. But mass protests are not enough. Impeachment talks continue but an impeachment procedure continues to be a lower-probability scenario for now, as many fellow PT MPs would also find themselves out of job if the government fell and early elections were triggered. Therefore, Dilma and the PT have no option but to restructure”.
“This means that a lot of what we already see, both politically and economically, is already priced in. In other words, we continue to like a more constructive view on Brazil, not because we like the economy – we don’t at all! – or political confusion, but just because the risk/reward balance is becoming attractive if Brazil can avoid the tail risk of a downgrade to junk”.