The Brazilian real stands tall atop the currency pile at present (the sovereign backed kind of currency anyway), at least according to Pam Woodall’s celebrated Big Mac index – a measure of how many delicious McDonald’s burgers you can buy with US$50. According to they, such script denoting the Efígie da República is overvalued to the tune of 61%. The country’s neighbours are on the podium also (Chile; Columbia for silver and bronze) but there is gulf between them, and the leader. The rising purchasing-parity of the real is also in lock-step with the surging Ibovespa index - ‘two-x’, as the parlance goes - closing north of 80,000 yesterday up from 40,000 in Jan of 2016; along with the real-denominated bond market which is similarly on the surge.
Brazil is pretty big; and it makes its presence known on the world stage: if you were noshing a Kung Pao Chicken in Shenzhen, you could just as easily be enjoying a bit of Brazilian bird (notwithstanding some import bans in recent years) and this is in a country – China – with 52 billion (yes, billion with a ‘b’) chickens. In addition to a significant exporter of commodities, Brazil is top five for land-mass; top five for population; a largish holder of foreign stocks and bonds; and – second only to China in its issuance of external US dollar debt.
At a glance you could infer that Brazil is tracking nicely – some sharp analysis from the team at Grant’s Interest Rate Observer notes the country’s recession era 2115 century bond (oversubscribed in 2015 and selling at 81 to yield 8.45%) traded at par in early Jan; 10-year USD sovereign debt trades on a spread of 192 basis points (the lowest since 2014) and the cost to insure against state default (through five-year default swap) costs only around 140 basis points (again, the lowest since 2014).
Real Brazil bulls may have a monkey or two in the wrench however: rumours of an imminent downgrade of Brazilian sovereign debt to ever deeper stratum of junk; the likelihood of ‘Car Wash’ Lula being elected (a man who has claimed to model himself on Donald Trump, which I think is an insult to Donald); the impending and very unpopular social-security reform act being passed; rising inflation; and years of underinvestment in infrastructure.
A sceptic might say it has all been a bit of lucky Macumba for Brazil, among other things: lowest-ever interest rates owing to low inflation, owing – in turn – to near record harvests. Don’t count your Big Mac’s before they’re in the bag though.
(I’m pretty sure that’s how that saying goes).
