By Jon Vollemaere, R5
By Jon Vollemaere, R5

There’s not a lot of coffee in Brazil…

July saw the bi-annual meeting of the Emerging Capital Markets Taskforce. An initiative from George Osborne’s office to help expand trading in EM markets in the City of London.

The Brazil Chapter has a focus on increasing ties between Brazilian Financial Markets and the UK. In particular, growing the levels of BRL trading and real based debt issuance in the square mile as opposed to New York. Highlights included the Lord Mayor visit to Brazil in July and the upcoming  Brazil / UK Economic and Financial Dialogue during which R5 is hosting the Banco Central do Brasil for a round table with London based BRL traders.

Most commentary and analysis coming out of Brazil appears to depict the Latin America giant in the middle of a great storm rather than its usual Carnival image. At the beginning of September 2015, the Brazilian real has felt its highest point in 10 years, the USD/BRL pair has surged above 3.80 due to the latest GDP 2Q report which showed that the economy contracted and fell into recession. 

The BRL is alas one of the worst performing currencies this year where emerging markets have been dragged to the bottom after the green dragon of the Chinese markets and the ongoing expectations of the interest rate benchmark hike by the US Federal Reserve. 

A central bank poll of economists released showed deteriorating prospects for Brazil’s economy this year and next, which also weighs heavily on demand for local assets. 

The rating agencies have downgraded the Brazil government bond rating three times this year, the latest rating is BB+ which puts the country at junk status. This caught the team by surprise, a Finance Minister official said. Brazil was investment-grade back in April 2008, when the country’s economy was on the rise. However, sliding commodity prices and austerity have created a recession, leaving the country with a higher than expected inflation – which is the main boogie man of its economy.

Fifteen of the world’s largest banks are under investigation on suspicion of rigging the Brazilian currency by antitrust watchdog CADE . The probe highlights the growing importance of international cooperation in efforts to root out different forms of market rigging. But also provides the perfect platform for the City of London to promote further BRL trading under the supervision of the FCA in the home of FX. Something everyone from the Chancellor, to the Lord Mayor to the Taskforce members are keen to promote.