Brazil July 2006

Brazil, the largest economy in Latin America, is expected to post GDP growth around 3.3 to 3.4 percent in 2006, according to Ideaglobal. The government’s trend toward looser monetary policy is expected to continue, with the country’s short term selic rate already down to 15.25 percent as of mid June.

Traders will be focusing on the Oct. 1 general and presidential elections, with the potential for pre election volatility in the currency. If current President Lula da Silva, of the Worker’s Party (PT), can maintain a clear lead, it could help keep volatility to a minimum. His main opponent is Geraldo Alkimin of the Brazilian Social Democracy Party (PSDB) party.

“Everyone expects the next government to be stable in terms of sound economic policy,” says ItaloLombardi, emerging market economist at Ideaglobal.

The USD/BRL rate was trading around 2.21 in late June. Ideaglobal analysts see potential for modest strengthening by year-end, with a target at 2.18.

“We think after the elections, things will turn positive again,” Alvarez says. “Fundamentally, little has changed.”

Others, however, expect the recent weakening trend in the real to continue. Bank of America’s Estebanez saw room for further decline toward the 2.45/2.50 area by year-end.

Moody’s Coutino also saw room for the real to slide to 2.45 by late 2006.