Will Brazil Turn A Corner In 2017?

Lior Alkalay - INO.com Contributor

In Brazil, the year 2016 will no doubt go down in the history books as one of the worst the country has experienced. The Brazilian president, Dilma Rousseff, was impeached for the role they played in a bribery scandal and for illegally disguising the country’s real debt. Moreover, the Brazilian economy had its worst recession in more than half a century.

And yet, there are some encouraging signs that, at least as far as the economy and the Brazilian Real are concerned, the country might have turned a corner.

Brazilian Bonds Revival

In the months of January and February, when the political climate turned more and more chaotic and Brazilian growth tumbled, yields on Brazilian 10-year bonds were as high as 16.78% and CDS prices, which measure the likelihood of a sovereign debt default, jumped to 7%. One would then expect that, from this point onwards, and especially in recent months with the prospect of a Fed’s tightening weighing on bond markets across the globe, the already fragile Brazilian government bonds would experience an utter meltdown, even to the extent of risking an actual default. But what happened instead was interesting. While bonds across the world were tanking and yields surging (bond yields move in reverse, relative to prices) amid the Fed’s tightening, Brazilian bonds staged an impressive rally, and yields on 10-year bonds fell from their highs back in January to as low as 11.4% today. Unsurprisingly, this was followed by an impressive rebound for the Brazilian Real. Continue reading "Will Brazil Turn A Corner In 2017?"

Brazilian Real May Face Another Spiral

Lior Alkalay - INO.com Contributor - Forex

A little more than a week ago, Brazil marked a historic milestone in its governance. After a lengthy process, and with a landslide vote, the Brazilian Parliament decided to impeach President Dilma Rousseff amid charges of corruption and breach of trust. For the record, Ms. Rousseff is widely held responsible for Brazil’s worst recession in a hundred years.

During the impeachment proceedings, which lasted some eight months, the Brazilian Vice President, Michel Temer, assumed the helm and took Rousseff’s place. Now, with the proceedings finally concluded, Michel Temer is officially Brazil’s president. Mr. Temer’s pro-business approach had been well rewarded with a period of grace from investors. Under Mr. Temer, the Brazilian Real rallied by 7% against the dollar, bond yields on Brazilian bonds fell and Credit Default Swaps, an important gauge for risk, fell as well. That made it easier for Mr. Temer to navigate and encouraged investors’ hopes for more pro-business reforms. But now, as Mr. Temer has turned from merely the acting president to the incumbent, the political climate is on the verge of change. The “grace period” afforded Mr. Temer during the impeachment proceedings has expired, and with the shift in sentiment the Brazilian economy and, consequently, the Brazilian Real, could fall into a tailspin.

The Brazilian economic crisis has three notable dimensions; a collapse in commodity prices, a weak monetary system, and an ugly fiscal picture. Continue reading "Brazilian Real May Face Another Spiral"

Mexican Peso Set To Rally Against EUR And JPY

Lior Alkalay - INO.com Contributor - Forex

The Mexican economy has been remarkably resilient to weakness in the US. Mexico’s exports to the US amounted to $295 Billion in 2015, a staggering 77% of total Mexican exports. Under such circumstances, one would expect the slowdown in US growth in the first quarter to tank the Mexican economy. Instead, robust growth in consumer spending allowed Mexico to grow at a fair pace of 2.6%, year-on-year. But now, as the tide in the US economy turns, the Mexican manufacturing sector, which suffered during the first quarter, could recover. Mexican GDP growth will move higher, and monetary policy will turn tighter. And the main benefiter? It’s the Mexican peso, which has been undervalued for quite a while.

How US Manufacturing Impacts Mexico

Mexico’s exports to the US are varied, ranging from beef to oil, yet the bulk of its US-destined exports are manufactured goods. Vehicles, vehicle parts, tractors, trucks and computer screens are among the manufactured items, and the list goes on. Transports and Machines are the top two categories and amounted to $186 Billion in 2015. Continue reading "Mexican Peso Set To Rally Against EUR And JPY"

LATAM: Watch Brazil But Buy The Peso

Lior Alkalay - INO.com Contributor - Forex

LATAM currencies are back in the game. Optimism over Brazil’s political future is growing and commodities, a key driver of regional growth, are recovering. Together, much of the uncertainty looming over the region has been removed and put regional currencies -the Brazilian Real, Mexican Peso and Chilean Peso into favor.

One important gauge of rising optimism is the price of Credit Default Swaps. Credit Default Swaps, or CDS for short, measure the cost of insuring against a bankruptcy. When the price of Credit Default Swaps falls, it points on lower risk and higher optimism. As the chart below indicates, Credit Default Swaps have fallen dramatically across the region since February, signaling a surge in optimism in the LATAM space.

Chart courtesy of Deutsche Bank

But the CDS chart illustrates another very interesting picture. While the fall in risk is across the board, Brazil, the largest economy in the region, is deemed as the most probable to default on its debt by a wide margin compared to much smaller regional peers. Continue reading "LATAM: Watch Brazil But Buy The Peso"

LatAM: First The Pain, Then The Gain?

Lior Alkalay - INO.com Contributor - Forex

Latin America is going to end 2015 with a big bang. The entire region has experienced what could only be described as a mini Latin Spring. The corrupt government of Argentina lost power to the pro-business leader, Mauricio Macri. Meanwhile, Venezuela's left-wing extremists suffered a defeat in Parliamentary elections. More recently, Brazil's president, Dilma Rousseff, is facing impeachment charges amid a corruption scandal.

All this naturally begs two questions; are the winds changing in the Latin American space and what does that mean for LatAm currencies? Continue reading "LatAM: First The Pain, Then The Gain?"