References

Sadia is one of the world’s leading producers of chilled and frozen foods. Established in Brazil in 194...
Cyrela Brazil Realty is the largest residential real estate developer in Brazil. Considered one of the m...
Today, Banco do Brasil is the largest financial institution in the Country with 24.4 million clients and ...
CPFL Energia is a holding company in Brazilian electricity sector, operating through its subsidiaries in ...
Copersucar S.A. is the largest Brazilian sugar, ethanol and bioenergy company and a significant player in...

Brazilian Real's short and long term performance discussed and predicted by major Banks


The Bank of America and Barclays Bank Plc predict that their investments in Brazil may slow in the days leading to and after the Brazilian election, coupled with the month long lull that has resulted in the Brazilian Real’s worst performance in Latin America. It is expected that with these investments freezing, the Brazilian Real’s continued poor performance may deepen.

 

The two banks had already cut their third quarter forecast for the Brazilian Real by over 2.5% in the last five weeks, consequently driving down the consensus year end estimate carried out by Bloomberg by 1.1% to 1.77 per dollar. Whereas the Brazilian currency declined by 5.4% in the gone months due to eurozone debt crisis that eroded higher yielding emerging market assets, the expected additional decline will be motivated by the election, particularly candidates’ comments before the election, local market strategist for Barclays said.

 

He added that there will a bit of concern over what the candidates do, what they don’t do, who they appoint and thus uncertainty, volatility and some weakening should be expected in the Brazilian Real. Barclays is the third largest currency trader according to Euromoney Institutional Investor Plc, and it slashed its September forecast last month to 2 Brazilian Reals per dollar from a previous 1.95.

 

On the other hand, North Carolina based Bank of America declined its third quarter forecast to 1.9% from 9.5% in April. This came amidst declines in the Brazilian Real of 1.8654 from 1.7648 in May upon speculation that credit rating downgrades in Greece, Spain and Portugal may slow the global economic recovery rate. The Brazilian Real’s drop represented the biggest fall amongst Latin America’s six major currencies.

 

The country’s cost to insure against the Real’s declines for the past three months exceeded the one year premium for the first time in 16 months on May 7, signaling investors are more worried over the currency in the short term as opposed to long term. Even so, the three months options gave investors the right to sell the currency cost 5.82% points, way above contracts bought at the same time.

 

According to analysts, the global volatility, sparked by the European debt crisis will ease in the coming months and as this fear subsides, it is expected that the Brazilian Real will under perform other currencies due to the elections. Politics will contaminate riskier assets in the election period and analysts expect the Brazilian Real to end the year at 1.85 with banking industry investors expected to focus on the campaign after the world cup, said Melzi, Barclays’ strategist.

 

June 8, 2010.