ING’s Chris Turner calls Brazil one of his preferred emerging markets, citing strong terms of trade, buoyant equities and expectations of 100bp in rate cuts. With USD/BRL now below 5.00 and implied yields above 13%, he expects continued BRL interest, seeing potential for USD/BRL to fall toward 4.80/85 if Middle East tensions ease.

Brazilian Real benefits from carry and Oil

"It seems like investors have an enduring demand for risk and some exposure to emerging markets. Latam as a region is seen as an outperformer, especially those with some independent access to energy."

"Brazil is a net energy exporter and its terms of trade have risen sharply since the outbreak of hostility in the Middle East. Brazilian equity markets have been flying this year and with the local central bank expected to cut rates 100bp this year, local currency bonds could do well if conditions calm down."

"USD/BRL has broken clear of 5.00 now. With implied yields in excess of 13%, we would expect the BRL to remain at the forefront of interest in emerging markets. The key threat is probably a political one should President Lula consider unfunded fiscal giveaways ahead of the October elections."

"However, investors look happy to bear that risk and USD/BRL losses could extend into the 4.80/85 area should the path to peace in the Middle East become any clearer."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)