If you thought metal prices — and iron ore in particular — were still all about China, you would be right. However, Brazilian monetary policy can make the difference between a profitable miner and one to avoid.
Brazil surprised the markets last week with statements leading analysts to believe further rate cuts may be enacted.
Asset class correlation is rarely an exact science, but traders have found that some indicators are still invaluable triggers for timing entries and exits on countries such as India and Brazil.
A combination of policy moves and a slowing economy have weakened the Brazilian real by 4.8% since the beginning of March, making it the worst performing currency tracked by Bloomberg. For exporters, this is a welcome change from the 8.7% appreciation in the first two months of the year, consequently making it the best-performing currency.
Central banks around the world are all jockeying to lower their respective currencies in order to prop up their economies. Just last week, Brazil’s central bank announced a 75 basis-point rate cut to 9.75%, bringing the country’s rates to the lowest level in years and sending the real down over 1% in just five days.
Nobody expects inflation to spiral out of control in Brazil over the next few years, but the controversy is exactly how mild price pressures are going to get.