Brazil: Investors likely being too optimistic - BBH

According to analysts from Brown Brother Harriman, investors are now likely being too optimistic with Brazil after being too pessimistic early 2016.

Key Quotes:

“Brazilian asset prices remain at elevated levels.  Just as markets may have been too pessimistic on Brazil in early 2016, investors are now likely being too optimistic.”

“The economy remains in deep recession. GDP is forecast to contract around -3.5% in 2016 before growing a modest 1% in 2017. GDP fell -5.4% y/y in Q1, and is tracking around -5% so far in Q2.  As such, we see downside risks to the growth forecasts.” 

“With IPCA inflation still above the 2.5-6.5% target range, easing is unlikely until Q4. Rates have been kept at 14.25% since the last 50 bp hike to 14.25% back in July 2015.”

“The weekly central bank survey shows analysts expect a year-end Selic rate of 13.25% and an end-2017 rate of 11.0%. COPOM next meets August 31. The statement and minutes from the recent July 20 meeting remained hawkish, suggesting no move will be seen in August. It seems that the October 19 meeting has become the most likely in terms of starting the easing cycle.”   

“In our view, this current Brazil rally is really based on sentiment and elevated expectations. The economic data remain poor, and the deep recession is making the fiscal adjustment even harder. We doubt the economy will see much of a bump from the Olympics (to be held August 5-21), as many tourists will be reluctant to attend given the risks posed by the zika virus.”

“BCB continues to sell reverse FX swaps in order to help limit BRL gains.  For now, the 3.20 area has proven hard to break for USD/BRL.  Retracement levels for the January-June drop come in near 3.56 (38%), 3.68 (50%), and 3.80 (62%). "