According to David Rosenberg at Gluskin Sheff, Brazil’s currency, the Real, remains one of the most attractive in the world.  The strength of an economy’s currency is generally a good reflection of the strength and health of ones underlying economy.  Brazil is in an envious economic position in the current environment with low debts and high growth.  Goldman Sachs recently elaborated on the allure of Brazil in “ignore Brazil at your own peril”.  In Rosenberg’s research report, he lists his 7 reasons why Brazil’s currency remains attractive – all of which I believe can be applied to the general attraction of the overall economy:

Brazil may well be the most attractive on the planet on a risk-return basis. Here are seven reasons why:

• It is just about the only investment grade country where inflation is slowing, the central bank has been easing, and where you can pick up a yield of over12% for 10-year paper.

• Its most recent change was a credit upgrade last September (Moody’s) and overall the rating agencies are generally favourable over the outlook.

• The inflation rate is 4%, slowing down and at the low end of the range of the past decade.

• The current account is in very small deficit, at just over 1% of GDP.

• The debt ratios are very well contained – 12 % gross external debt and 43% government debt as a share to GDP (the US comparables are 95% and 62% respectively).

• The real is on an appreciating track (+27% in the past year) and that is because Brazil’s terms-of-trade (export price to import price ratio) is flirting near a 12-year high.

• Given that real short-term rates are around 4.5% and the consensus view is 5% real growth this year, there would be little reason to be bearish on the currency outside of a currency setback (and FX reserves at $240 billion are up  15% in the past year and 30% in the past two years.

The biggest risk is if there is a global relapse that drags Asia into the vortex and
impair the commodity complex as this would undoubtedly reverse the impressive gains made in the currency — after all, it’s not coffee that is Brazil’s primary export but iron ore; and it is not the USA but China that is the country’s largest customer.

Source: Gluskin Sheff

Cullen Roche

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