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.
|The information in this report was compiled by the staff at City National Bank from data and sources believed to be reliable but City National Bank makes no representation as to the accuracy or completeness of the information. The opinions expressed, together with any estimate or projection given, constitute the judgment of the author as of the date of the report. City National Bank has no obligation to update, modify or amend this report or to otherwise notify a reader in the event any information stated, opinion expressed, matter discussed, estimate or projection changes or is determined to be inaccurate. This report is intended to be a source of general information. It is not to be construed as an offer, or solicitation of an offer, to buy or sell any financial instrument. It should not be relied upon as specific investment advice directed to the reader’s specific investment objectives. Any financial instrument discussed in this report may not be suitable for the reader. Each reader must make his or her own investment decision, using an independent advisor if prudent, based on his or her own investment objective and financial situation. Prices and availability of financial instruments are subject to change without notice. Financial instruments denominated in a foreign currency are subject to exchange rate risk in addition to the risk of the investment. City National Bank (and its clients or associated persons) may, at times, engage in transactions in a manner inconsistent with this report and, with respect to particular securities and financial instruments discussed, may buy from or sell to clients or others on a principal basis. Past performance is not necessarily an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.|