BRL's 'so-so' performance in 2017 - BBH

Analysts at Brown Brothers Harriman explained that the Brazilian real has done much better after an awful 2015.  

Key Quotes:

"In 2016, BRL rose 22% vs. USD and was the top EM performer.  So far in 2017, BRL is up 2.7% YTD and is near the middle of the pack. Our EM FX model shows the real to have NEUTRAL fundamentals, so this year’s “so so” performance is likely to continue.

Since the beginning of Q2, USD/BRL had traded largely in a 3.10-3.35 range. Indeed, the 3.10 area has proven to be a tough level to break and the current bounce may have some room to go. Retracement objectives from this month’s drop come in near 3.1950 (38%), 3.22 (50%, and 3.2465 (62%).  

Brazilian equities are underperforming EM after a strong 2016. In 2016, MSCI Brazil surged 57% vs. 7% for MSCI EM. So far this year, MSCI Brazil is up 11% YTD and compares to 24% YTD for MSCI EM. This underperformance should continue, as our EM Equity model has Brazil at a VERY UNDERWEIGHT position.  

Brazilian bonds have outperformed recently. The yield on 10-year local currency government bonds is about -128 bp YTD. This is behind only Argentina (-266 bp) and well ahead of the next best Indonesia (-97 bp) and Peru (-78 bp).  With inflation low and the central bank likely to ease further, we think Brazilian bonds can continue outperforming for now.  

Our own sovereign ratings model showed Brazil’s implied rating steady at BB+/Ba1/BB+ after a one notch improvement last quarter. Actual BB/Ba2/BB ratings still have modest upgrade potential. The economic outlook is poor, but we see scope for further improvement in Brazil’s implied rating if the cyclical recovery picks up as we go into 2018."