• Top forecasters paid more heed to commodities than politics
  • MPS, SEB see real up again this quarter, weaker by year-end

A strategist in Tuscany, a forecaster in Warsaw and an analyst in Stockholm are proof that it’s possible to follow a market too closely.

What do the three men have in common? They did a better job calling the Brazilian real’s world-beating rally in the first quarter from as much as 6,700 miles away than their counterparts closer to Sao Paulo who are knee-deep in protests and polemic. Italy’s MPS Capital Services, Sweden’s Skandinaviska Enskilda Banken and Poland’s Cinkciarz.pl were the most-accurate real soothsayers in Bloomberg’s quarterly rankings, besting groups with far more experience in the region and teams on the ground.

What stands out about the trio isn’t just their relative unfamiliarity with Brazil -- two of the three chief forecasters have never visited the South American nation -- but where they’ve been taking their cues. MPS Capital Services, SEB and Cinkciarz.pl largely discount the day-to-day political turmoil that has turned Brazilian markets into the world’s most volatile. Instead, they lumped the nation in with the rest of its emerging-market, commodities-dependent peers whose fates are closely tied to China.

By year-end, all three forecasters expect the real to tumble as China struggles and Brazil’s economy deteriorates.

“Sometimes being on the outside helps,” said Antonio Cesarano, the head of market strategy at MPS Capital Services, whose team in the medieval Italian town of Siena forecast the first-quarter real rally at the end of last year. “From where we sat, there was this perception of excessive pessimism in regards to emerging markets and Brazil in particular.”

Internal Turmoil

Brazil’s real surged 10 percent in the first quarter, then gave back some of the gains this month. It rose 2.1 percent to 3.6123 per dollar at 4:17 p.m. on Friday in Sao Paulo trading.

It’s easy to see how anyone following the blow-by-blow of Brazil’s political saga would get bogged down by the details. President Dilma Rousseff is fighting for her political survival and currently wrangling to garner enough votes in the lower house to fend off impeachment. A sweeping corruption scandal that has shattered the political and economic leadership shows no signs of abating, with new allegations and arrests being made every few weeks. All the while, Brazil is slipping deeper into its worst-in-a-century recession and the nation’s budget hole has exploded to 11 percent of gross domestic product.

Changing Forecasts

Per Hammarlund, the chief emerging markets strategist at SEB in Stockholm, said it’s a fool’s errand trying to hang forecasts on politics -- there’s just too much uncertainty.

“Things are changing too fast,” said Hammarlund, the only one of the top forecasters who has visited Brazil and has been covering the currency for more than a decade. “We couldn’t be changing our forecasts all the time.”

Against the gloomy backdrop, many market watchers are seizing on the chance of a new government as Brazil’s best hope for a recovery. While the euphoria surrounding a possible impeachment helped fuel the real’s 10 percent rally in the quarter, it’s an impetus that’s losing its punch. Brazil, at its core, is still largely dependent on prices for commodities, Cesarano said.

“The commodities story should consolidate in the second quarter and that should continue to support the real,” said Cesarano, who sees the currency strengthening to 3.5 per dollar by the end of the first half.

Price Swings

Brazil’s outlook, like the rest of the emerging-market world, depends heavily on China and its efforts to revive economic growth. Signs that stimulus efforts were taking effect helped send the S&P GSCI index of raw materials up 3.8 percent in the first quarter, while a basket of 20 developing-country currencies gained 5 percent.

Marcin Lipka, Cinkciarz.pl’s market analyst, also thinks the real’s trajectory will be closely tied to commodities this year. Raw materials account for more than half of Brazil’s exports, while companies that depend on the sector make up about a fifth of the benchmark Ibovespa stock index.

"We see some strong volatility for the real going forward," said Lipka, who started covering Brazil’s currency a year and a half ago. The currency will be driven both by “external factors such as China and commodity prices and also political factors domestically,” he said.

SEB and MPS Capital Services both forecast the real to end the year at 3.9 per dollar, while Cinkciarz.pl puts it at 4.

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