Currency traders going short on the Brazilian real have had a fantastic run of form in 2015. That speculators are bearish on this BRICS country is deeply rooted in fundamental and structural weaknesses in Brazil. For starters, corruption, malfeasance and historically low levels of support for the President have sent the Brazilian economy into a tailspin. Just recently, the Brazilian real plunged 3.3% to the USD when it was trading at R$3.9028. At those levels, the Brazilian currency is fast approaching the R$4:1 ratio and this places it well within its 12-year low point. Analysts across the board are firmly of the opinion that capital outflows from the Brazilian economy are going to continue.
Recent Performance of the Brazilian Real vs USD
As talk of US rate hikes gains ground – whether in September or before the end of 2015 – disinvestment or reduced levels of investment in economies like Brazil is bound to take place. There is a large amount of portfolio readjustment in the works, with financiers and investors carefully weighing their options vis-a-vis emerging market economies and the inherent risks they come with. With respect to the Brazilian real, there is an incredible amount of volatility and there is a high risk of further downgrades by top ratings agencies like Fitch and Moody's. As more capital outflows take place, so the demand for the Brazilian real decreases. This is precisely what has transpired, and is evident in the cross-currency exchange rate. The current exchange rate of the Brazilian real to the US dollar is 3.8751 (+1.56%) as at September 15, 2015.
Between 1993 and 2015 the average currency exchange rate for the Brazilian real and the US dollar was 1.88. The worst trading level it reached was back in 2002 when it was trading at 3.95 to the dollar and in 1993 a record low point was hit when it was trading at 0.01 to the greenback. Brazil has been plagued by hyperinflation in recent years. Between 1980 and 2015, the average inflation rate in the country was 381.67%. By April 1990 the figure spiked to 6,821.31%. However by the end of 1998 this had fallen to a record low figure of just 1.65%. It is clear that monetary policy in Brazil is just as inept as the fiscal policy measures adopted by government in terms of spending and taxation.
The current rate of inflation in Brazil is 9.53%. This is 0.03% lower than the July figure which measured as the highest rate of inflation for 2015 at 9.56%. From the start of the year to the end of July, the inflation rate was consistently increasing in Brazil. It began at 7.14%, 7.7%, 8.13%, 8.17%, 8.47%, 8.89% and topped out at 9.56%. Rapidly rising inflation is indicative of excess monetary stimulus. The next inflation rate forecast for September is going to be released on 7 October 2015. Analysts are expecting an uptick in the rate of inflation to 9.92%. This dovetails perfectly with the other economic indicators emanating from Brazil.
Capital outflows are one of the most significant concerns for the Brazilian economy. That the Brazilian real has hit a multiyear-year low against the dollar recently is testament to the structural weakness in the economy. What spurred the latest decline in the value of the currency was a downgrade by Standard and Poor's on Wednesday, 9 September. The country now has been deemed the equivalent of junk status. Given these weak numbers, the Brazilian real is clearly the contender for worst performing emerging markets currency of 2015. Other market factors weighing heavily on the currency, include persistent equities weakness in China, a strengthening US dollar, weak commodities prices and high levels of volatility in the market.
For Brazil however the problem is compounded by the fact that the President has hit historically low levels of support from within Congress. Additionally, the government is unable to pass through austerity measures. Analysts are now positing that the Brazilian real may decline to as low as 4.40 to the USD within 2 months. Most everybody is certain that the recent credit downgrade, lack of political will and the structural weakness within the Brazilian economy will result in an exchange rate well beyond the worst the country has ever seen. It must be remembered that the country's current account deficit will only swell as capital flight continues. Brazil's debt is ballooning out of control and one of the first victims is always the country's currency. As a trader, you certainly cannot go wrong by placing put options on the Brazilian real moving forward.
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