Bloom off the Brazilian Rose

Latin American currencies continue to perform well despite the recent string of disappointing US economic data. There is only one Asian currency that has out performed the Mexican peso for example over the past month (the Korean won is up 5.1% while the peso is up 4.3%). Brazil on the other hand has appreciated 1%, which is less than most of emerging Asia except Thailand, Hong Kong and China.

Brazil has disappointed many. The central bank was expected to have hiked by 75 bp and it only hiked by 50 bp last month. There are signs that the Brazilian economy may be losing some momentum. Industrial production slowed more than expected and today's report on service sector confidence fell to the lowest level of the year. With the economy slowing, some investors are growing more concerned about rising debt/GDP ratios. This may be a factor behind the rise in the 5-year credit-default swaps to their highest level since late 2008.

Although foreign flows have favored the Brazilian bond market, last month was the first since March that foreign investors were net buyers of Brazilian shares. Japanese flows into Brazilian bonds appears to have slowed, but this could be a function of seasonal patterns and the payment of Japan's summer bonuses.

Inflation pressures appear to be easing a bit in Brazil and this is likely to be reinforced by the next set of IBGE, FGV and FIPE inflation reports over the next week or so. The trade balance, which is deteriorating, may receive more attention, when released (on a weekly basis) on Aug 9. June retail sales will be reported on Aug 11. May numbers were strong with a 1.4% rise on the month and a 10.2% gain year-over-year. A soft report would likely reinforce ideas that domestic demand is slowing.

In terms of the real itself, it does not appear to be going anywhere quickly. New buying of the real dries up when the dollar slips below BRL1.75, in part due to fear of official action. New BRL interest is seen when the greenback firms toward BRL1.80.