January 2020 Review

Brazil

January saw the USD/BRL move to all time highs 4.28. This trend continues into February – currently 4.34. There are multiple factors both domestically and internationally which are moving the USD/BRL.

Retail numbers from November were disappointing and caused the USD/BRL to move upwards, adding doubt about the strength of Brazil’s recovery.

The Coronavirus has scared global markets and the USD has strengthened globally vs most currencies. Brazil will be affected short-term due to trade disruption and could see as much as 0.3% of GDP disappear.

Brazil interest rates are now at 4.25%, an all time low. This reduces the appeal of the ‘carry-trade’ – borrow cheaply, invest at higher interest rates globally. It highlights the need, in our opinion, for FDI (foreign direct investment) into Brazil to move the BRL higher long term.
Private sector activity expanded in January at the fastest pace in 4 months giving rise to optimism but external factors still weighed heavily on USD/BRL.

Technical analysts will point to the fact that long-term resistance has been broken (4.18 – 4.20) this means we are trading at levels never seen before. With a central bank waiting in the wings but clearly a less interventionist government, it is unclear where USD/BRL would trade before the central bank steps in more aggressively.

A high public debt and the need for continuing reforms make it hard to see a strong BRL for 2020. That said, we believe long term conditions in Brazil are intact due to low interest rates and a pro-business government.
International investors need to come back to Brazil – they haven’t, yet – so FDI (foreign direct investment) is an important driver long term.

Global

The USD was the clear winner in January. The dollar was up pretty much against most major currencies, including the EURO, JPY, GBP and CHF (swiss franc). Strong economic growth and a flight to safety due to the Coronavirus has made the USD the go-to currency for January. Donald Trump’s impeachment trial neared a close and, as expected, the Senate recently acquitted him. Phase 1 of the US/China trade deal was signed in January which was USD positive.

GBP/USD – the pound strengthened as the UK officially exited the European Union. The Bank of England kept rates on hold which gave sterling a boost.
EUR/USD – At month end EUR/USD was at 1.10, Euro growth is unclear and industrial production fell in December, limiting any major gains for the Euro.

USD/JPY – Both currencies remained stable acting as safe havens for the Coronavirus.

Alternatives

Gold, often mistaken as only a commodity, acts as a currency/safe haven and has performed well since January. Gold has risen in all currencies since January and continues to remain stable.

Bitcoin has risen over 30% in January and continues to provide an alternative option for people looking to invest/trade outside of standard currencies.

Bitcoin represents around 160billion USD in market capitalization – roughly 1.5% of the value of all Gold ever mined.

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