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Why the Brazilian real could depreciate further (Part 2)

Continued from Part 1

The foreign exchange depreciation has caused big losses for investors in Brazilian equities (EWZ) through 2013Q2—and the FX slide may continue

There are other analysts forecasting a weaker BRL. We’re aligned with several of the reasons arguing for a weaker BRL.

iShares Brazil ETF 2013-07-30Enlarge Graph

Continuous social unrest

The continuous noise from local protests got the mainstream media attention in May and has spread to over 100 cities. The social unrest naturally worries investors, especially since it came right after the world had focused on political instability in both Egypt and Turkey, so investors tend to extrapolate.

To make matters worse, the response by the government to both the current economic situation and the protests themselves was highly criticized. In our opinion, it was handled poorly, mainly because the government ended up yielding to several, if not most, of the original demands but received almost no credit.

Furthermore, the slow attention allowed for more demands to build up, going beyond the transportation fare complaints and into areas as far as corruption outcries and gay rights support. So the slow reaction led to mounting demands that will now be harder to meet. The corruption charges that came about will probably end up reflecting poorly in the current administration rather than helping its image.

Other demands met, while positive, won’t show improvements in the economy until a longer time horizon. Take, for example, the investment of a large percentage of oil royalties into healthcare and education. Certainly a good-long term view, but one that won’t immediately help either the government’s image, the Brazilian equity market (EWZ), or the foreign exchange rate.

Continue reading for more arguments in favor of further depreciation

Continue to Part 3