BRL: Can flows pick up the baton from carry? – Deutsche Bank

The BRL’s recent outperformance on the back of the Brazilian government’s successful auctions of exploration rights and energy concessions are not due to a one-off, suggests Sebastian A. Brown, Strategist at Deutsche Bank.

Key Quotes

“BRL drivers: from carry to capital flows

Our expectation of an increase of growth-driven capital flows into Brazil lead us to believe that BoP strength rather than the BRL’s carry could now hold the baton as a driver of the BRL’s strength.”

“Significant FDI inflows in the pipeline

We expect FDI inflows into Brazil to remain positive and even strengthen further if China’s plans to invest over USD 20bn next year comes to fruition.”

“Increasingly stable external financing mix

As FDI inflows strengthen portfolio flows have weakened significantly which (at least on the fixed income front) has been surprising. Yet the end result has been an improvement of the stability of Brazil’s external financing profile.”

“Light foreign positioning on equities and improving growth prospects

The economic upturn and the under-allocation of foreigners into Brazil’s local equity markets are together likely to result in further foreign inflows into Brazil especially as the BCB continues easing monetary conditions.”

“Long BRL, pick your funding

We recommend being long BRL/CLP as the CLP’s rally has the peso well above estimated fair value especially as inflation weakens. Also, if the EUR resumes an appreciation phase we think the USD/BRL could test 3.0. A more conservative implementation would fund a long BRL position with a basket of USD and EUR.”