Strong Brazilian Retail Sales, Strong Real

Brazil reported much better than expected Feb retail sales and this is encouraging expectations of a 75 bp rate hike later this month and allowing the real to extend its winning streak for the fifth consecutive session. The real has now recovered all the ground lost in the first several weeks of the year. Today is the first day the greenback is trading below BRL1.75 since the first half of Jan.

Retail sales jumped 1.6% in Feb, which was nearly 3 times greater than expectations and comes on the heels of a 3.0% rise in Jan. On a year-over-year basis, Brazilian retail sales have risen 12.3%. The sales were led by clothes, household goods and foodstuffs. The yield on the interest rate futures rose 5 bp.

The Bovespa has risen about 17.5% off the early Feb lows and looks to move higher despite the prospects of higher interest rates. That said, we note that the IPO of EBX has been cancelled and that decision very early today comes on the heels of a disappointing IPO last month from the same Eike Batista, among the richest Brazilians. Meanwhile, the most recent polls show that Lula's hand-picked successor Rousseff has nearly closed the gap with Serra. Ironically, both candidates promise to continue Lula's policies.

While the risk of a 75 bp rate hike at the next COPOM meeting is increasing, it is not a done deal and this may become more apparent tomorrow with the April inflation figures. After an outsized 1.1% increase in March, the FGV measure is likely to moderate to about half the pace. If true, these latest gains in the BRL may have to be tested first. Moreover, the near-term risk-reward seems to shift as the BRL1.70 is approached.