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TALKING POINTS – TRUMP-BOLSONARO MEETING, IBOVESPA, CHINA TRADE, PENSION REFORM

  • Brazilian assets are eyeing Trump-Bolsonaro meeting
  • Trade, security, China are key topics on the schedule
  • Optimism over Brazil economy hinge on pension reform

See our free guide to learn how to use economic news in your trading strategy!

Brazilian President Jair Bolsonaro will be meeting with US President Donald Trump on Tuesday as the two discuss key issues ranging from concerns about security to issues over trade. During Monday’s trading session, as a gesture of good faith, the Brazilian government announced that it has removed visa requirements for visitors coming from the US and a number of other developed countries. It is not likely the US will reciprocate.

However, this also helps Brazil’s economy because it will boost tourism and provide a financial stimulus. This also falls in line with the new government’s goal of opening up the country more to foreign exposure as outlined in Bolsonaro’s speech at the World Economic Forum in Davos, Switzerland. This marks a fairly significant departure from the country’s previously more reclusive nature when it came to foreign investment.

Additionally, Brazilian Economy Minister Paulo Guedes made a series of announcements today that illustrated a more liberal approach to trade and investment in Brazil. “We are here to open our markets” he said and pointed a finger at state-owned companies that are the “nests of political corruption”. Guedes in fact is the main reason why investors started to become more interested in Brazilian assets.

TRUMP-BOLSONARO MEETING: SECURITY, TRADE, CHINA

Earlier this month, Bolsonaro confirmed that the US will be allowed to use the Alcantara Launch Center to send satellites into space and will be granted access for uranium exploration. This marks a significant breakthrough for the two countries. The Brazilian government was weary of granting a foreign power access to its land in the past, especially with the kind of advanced technology involved.

This deal could help Brazil enter the OECD, with unnamed officials already saying they want to help Sao Paulo achieve this goal. The two are expected to discuss prospective deals in infrastructure and energy projects They will also have preliminary discussions on trade, though walking out with a solid agreement is not likely given the packed docket of topics and the limited duration of the visit.

In addition to both being firebrand populists, Bolsonaro and Trump also share a common concern: China. The Brazilian President has been uneasy about China’s future relationship with Brazil and has expressed concern over the degree of influence Beijing would have on Latin America’s biggest economy. However, despite this concern, officials in Sao Paulo have stated that they do not intend on reducing their trade with China.

However, trading relations between the two may be complicated if the US and China reach a trade agreement. Earlier this month, China proposed to purchase an additional $30 billion a year of US agricultural goods, including soybeans. This would come after Beijing imposed duties on US soybean imports following Trump’s tariff tantrum in 2018.

Chinese importers subsequently switched to making purchases in Brazil’s oilseed market and helped lift the country’s exports. However, now a reconciliation between China and the US risks reducing the number of exports coming from Brazil, hurting the country’s growth prospects. At a time when global performance is slowing and the Brazilian economy is still working to fortify itself, the last thing the it needs is a new headwind.

Bolsonaro and Trump are also both expected to discuss the political and economic turmoil in Venezuela. Military ties between Sau Paolo and Washington are expected to tighten with Bolsonaro entertaining the idea of allowing the US to use a military base in Brazil.

OUTLOOK FOR BRAZILIAN REAL, IBOVESPA

Trump and Bolsonaro will be holding a joint press conference in the Rose Garden during Tuesday’s visit, and the anticipated upbeat message from the world leaders will likely send the Brazilian Real and Ibovespa higher. Year-to-date, the index has climbed over 14 percent and on Monday it reached a new high of 100,000 points for the first time. Closer economic ties with the US will likely provide an additional boost.

Ibovespa Futures – Daily Chart

Chart Showing Ibovespa Futures

The rally in the index is being primarily driven by hopes that Bolsonaro can push through key structural reforms that will remove much of the risk associated with Brazilian assets that has kept investors at bay. The main policy that has gathered international attention is the government’s plan to overhaul the country’s bloated pension system.

The bill will hit the floor in the lower house of Congress in May and is anticipated to be passed as soon as June. The next barrier will be then to push it through the Senate in August. If passed, a flood of new investment may hit the Brazilian markets and push the Real and benchmark index higher if investors see that a major structural risk has been significantly reduced.

FX TRADING RESOURCES

--- Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter