TALKING POINTS – BRAZIL INDUSTRIAL PRODUCTION, BRL, GLOBAL GROWTH, IBOVESPA
- What does Brazil industrial production say about global growth?
- How has US-China trade war spat benefit and hurt Brazil data?
- Ibovespa and BRL trending cautiously lower amid uncertainty
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The Brazilian Real and benchmark Ibovespa equity index will be watching for upcoming industrial production data. Since April 2018, the data for this particular indicator has been showing broad weakness with an overall downward trajectory. Global composite PMI is showing a similar trajectory after world growth prospects were shattered from the pain of trade wars and Fed tightening.
Relationship Between Global Composite PMI, Brazil Industrial Production
Brazil is the second-biggest exporter of iron ore – a key input in global production – and a top supplier of a range of other raw materials, making its assets sensitive to changes in the worldwide business cycle. If there are signs that global growth is slowing, the economies that are positioned in the beginning of the global supply chain will be the first ones to feel the pain and may therefore serve as canaries in the coal mine for potential headwinds in the future.
Brazil is also the largest economy in South America. If indicators are showing weakness there, the implications for regional growth prospects are brought into question. This may then make investors with exposure to emerging market assets twitch. Much like Australia and New Zealand, Brazil exports cycle-sensitive commodities, and therefore changes in global risk appetite are in part reflected in Brazilian asset prices.
During the height of the US-China trade war, despite Brazil indirectly benefiting from higher soybean exports, slower Chinese growth led to declining iron ore exports out of the power node of South America. Consequently, performance in Brazilian economic indicators is also a reflection of growth prospects out of China, one of the largest economies in the world.
Brazil-China Iron Ore Trading Relationship
Domestically, President Jair Bolsonaro’s pension reform have also been a key driver of Brazilian asset price action because of the long-term implications it has for the Brazilian economy. If producers anticipate the structural reforms will not pass – consequently leading to poorer growth prospects – the pessimism will be reflected in the indicators. To keep up to date on these key reforms, be sure to follow me on Twitter @Zabelin.Dimitri.
Looking ahead, year-on-year industrial production is expected to fall 4.8 percent, erasing its previous rise of 2.0 percent from the month before. Meanwhile, the Brazilian Real continues to trade lower against the US Dollar as the Ibovespa is cautiously trending sideways, with what looks like a downward-facing bias. To find out why, be sure to read my comprehensive outlook on the Real and Ibovespa.
Ibovespa Futures, BRL/USD
Note: Usually Brazilian Real-US Dollar crosses are quoted as “USD/BRL”.
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--- Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com
To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter