Brazil Markets Search For Direction After Holiday
By Win Thin
Brazil current account deficit came in at a wider than expected -$5.7 bln in March, but was fully covered by FDI totaling $6.8 bln that month. On a 12-month rolling basis, FDI was $60.4 bln vs. a current account gap of -$49.8 bln, pushing the basic balance up to +$10.6 bln, the highest since September 2009. As a share of GDP, the current account deficit has remained around -2.3% since September 2010. Finance Minister Mantega said that through the 26th , FDI totaled $4 bln in April and so the inflows remain strong and supportive of the real. And this doesn’t even include any of the portfolio inflows. A slow grind lower for USD/BRL remains in play, though markets will be nervous around 1.5545, the 2008 low as more FX measures are likely to be seen on a break towards 1.50.
Since coming back from the 4-day holiday weekend, Brazil markets have traded largely sideways. USD/BRL made a marginal new low for the cycle Monday around 1.56 but no follow-through has been seen, while the Bovespa has been hovering around 67000. Markets are getting a bit concerned about central bank credibility after it hiked by only 25 bp this month instead of the expected 50 bp, even as inflation is moving towards the 6.5% ceiling (6.44% y/y in mid-April). Minutes from the April 19/20 meeting will be released this Thursday. We already know that the vote was split 5-2, with 2 dissenters wanting a 50 bp hike, but markets will be looking for how the discussions were framed. Loan data for March is out Wednesday, and has been accelerating to 21% y/y, the high for this current cycle. Inflation and inflation expectations continue to creep up, and so macroprudential measures are clearly not working to date. COPOM next meets June 7/8, and with the numbers still deteriorating, we think that they should deliver a 50 bp hike to try and regain credibility. Whether they actually do it is another matter.