Regular EM readers here would know that we have been bullish on Brazilian Sovereigns since March. The fundamental drivers behind this thesis have roughly been two folded: The market being over-pessimistic of the re-ascension of Lula to the office and over-concerned with the inflationary resilience of the Brazilian Economy. With the SELIC policy rate at an astonishing 13.75% and Inflation now lower than in most developed economies – Campos Neto may soon start to call the mission accomplished:

Chart 1: Brazil’s inflation

We too have been, and to an extent remain, rather upbeat on BRL as it carries well though with cuts in store for August, it will slowly lose traction. The current account deficit combined with increasing FDI’s and attractive rates have seen the BRL rally along with other LatAm currencies- the Mexican Peso being the latest subject of our assessment, see here. Investment coming into Brazil is arguably less political than what is driving the current boom in Mexico and as a result Real strength is likely to show less fortitude once tailwinds lose steam- But perhaps it won’t be here we see the first domino falling?

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