Since the beginning of 2015, the markets have been consumed with two continuing trends -- global central banks cutting interest rates and the aftermath of the Greek election.

But now – the markets are turning their attention to a new crisis in Brazil, the 7th largest economy in the world and the largest in Latin America. In the past six months, the Brazilian real has fallen by almost 21% and in February alone, it has fallen by nearly 6.0% to a 10-year low.

While 17 countries have cut their interest rates since the beginning of the year, Brazil has raised their interest rates by 100 bps since December to 12.25%. The Central Bank of Brazil is raising interest rates to defend a sharply weakening currency and to fight rising inflation. Part of that, believe it or not, is energy prices, which are higher due to government taxes being imposed to offset a fiscal deficit.  The perfect storm of politics, corruption scandals, higher interest rates, a multi-year drought, and declining commodity prices are all conspiring to cause the economy to implode. Recent economic updates are forecasting negative growth in 2015 with continued rising inflation.

The Brazilian economy is highly dependent on its ability to export raw materials. Prices for many of these exports have crashed causing the Brazilian trade deficit to widen sharply. Due to the severe multi-year drought, water and energy rationing are almost guaranteed.

Brazilian President Dilma Rousseff won the most recent election in October by a very narrow margin. As the economy continues to weaken, her popularity continues to drop and she is losing support in the Brazilian Congress.

My View: We see no silver lining in this scenario. With no real support at the federal level, the responsibility for saving the economy falls on the central bank of Brazil, which is caught between a rock and a hard place fighting both rising inflation and a sinking economy. We see more pain ahead for the Brazilian economy and its currency.

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