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Will the Brazilian Real Trade Lower in 2016?

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Series overview

In this series, we’ll discuss the outlook for the Brazilian real, Mexican peso, and the Swiss franc. What Can Investors Expect from the US Dollar in 2016? was our first series. We examined the outlook for major currency pairs including the US dollar, the euro, the British pound, and the Japanese yen. In our second series, Chinese Yuan Has a Bearish Outlook in 2016, we examined the outlook for major currency pairs including the Chinese yuan, Indian rupee, Russian ruble, Australian dollar, and the Canadian dollar. 

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Brazilian real struggled

The Brazilian real weakened to record lows against the US dollar in 2015. It fell due investment outflows resulting from the domestic political crisis, economic contractions, as well as high inflation and low crude and commodity prices globally. Speculations about the impeachment of President Dilma Rousseff and whether she would be able to pass the crucial austerity measures created jitters among investors. This caused short positions on the Brazilian real.

Nelson Barbosa replaced Finance Minister Joaquim Levy—a supporter of Rousseff’s austerity plan. The Brazilian markets seem to be on an edge amid a bleak outlook for fiscal reform. Also, a contraction in the nation’s GDP (gross domestic product) also put pressure on the Brazilian real. The economic decline combined with increasing inflation gave the Central Bank of Brazil less room to alter the monetary policy. The revenue from exports has been on a falling trend. Commodity and crude prices fell across the world. There was also a slowdown across China. This widened the trade deficit numbers. Lower consumption by China and decreased demand for imports caused problems for countries involved in the export of raw materials. Commodities’ prices are expected to remain bleak in the near term. The outlook for Latin American currencies like the Brazilian real, the Colombian peso, and the Chilean peso seems to remain weak.

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Depressed investor sentiment and contraction in industrial production

Depressed debt ratings by credit rating agencies also weighed on the sentiment concerning the Brazilian real. Standard & Poor’s downgraded Brazil’s credit rating from “investment-grade” to “junk” status in September. Specific funds that target only investment-grade countries as financial options are expected to move out. This intensifies the massive dark clouds hovering around the Brazilian economy. A contraction in manufacturing and industrial production, combined with negative growth in retail sales, showcased that depressed consumer spending is expected to weigh more on the Brazilian real in 2016. The US dollar-Brazilian real currency pair could cross the 4.00 mark in the near term.

Impact on the market

The iShares MSCI Brazil Capped ETF (EWZ) ended 38.6% lower at the end of the year from January 2, 2015, to December 28, 2015. On the other hand, the Direxion Daily Brazil Bull 3X Shares ETF (BRZU) ended 68.2% higher.

Among the Brazilian ADRs (American depositary receipts), Petroleo Brasileiro Petrobras (PBR) fell by 34.2%. Mining-related companies fell heavily in 2015. Vale (VALE) and Gerdau (GGB) fell by 59.2% and 64.6%, respectively.

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