More interest in Brazil’s currency
In the previous part, we discussed that a series of problems are impacting Brazil’s performance. So, why are currency investors showing more interest in the Brazilian real?
Anti-government forces help drive the Brazilian real
Rising political unrest in the current government raised hopes among investors for a political reformation in the country. The detention of the Brazilian (EWZ) president regarding corruption charges in the state-owned oil company Petrobras (PBR) is one of the most significant turnarounds in boosting investor confidence. The Brazilian real is reacting positively to rising anti-government agitation.
Fed’s dovish stance
Brazil is a commodity-dependent economy. The appreciation in the Brazilian real can be correlated with the fall in the US Dollar Index (UUP). Since commodities (DBC) are dollar-denominated assets, a stronger dollar impacts commodities’ movement. Fed Chair Janet Yellen’s recent statement clearly indicates the “cautious” stance of the Fed. Policymakers are expecting more downside risk for the US (QQQ) (VFINX) (IVV) (SPY) due to the global (ACWI) slowdown. This statement weakened the US Dollar Index against other currencies. It boosted other currencies.
A weaker dollar helps move the investment from the currency market to other riskier asset-like commodities. Therefore, the last two-month equity run was backed by the rise in commodity prices. Next, we’ll analyze the potential outcomes for the geopolitical situation in Brazil.