Year-to-date, the WisdomTree Brazilian Real ETF (NYSEArca: BZF), which follows real currency movements against the dollar, is one of the worst-performing emerging markets currency exchange traded funds and with good reason.
The real could face increasing pressure as global investors price in the rising odds of Brazil losing its investment-grade credit rating. New details regarding Brazil’s tenuous grasp on an investment-grade credit rating are emerging and those details could limit the near-term upside for EWZ and rival Brazil ETFs.
Earlier this month, Standard & Poor’s pared its rating on Brazil’s sovereign debt to junk status and some traders expect more credit downgrades to follow for Latin America’s largest economy. That scenario, if it comes to pass, is likely to further pressure BZF and the Brazilian currency. [Bad News for Brazil ETFs]
Traders have meager expectations for a real rebound anytime soon.
“Brazil’s economy has fallen into a deep recession with an expected contraction of 2.7% for 2015 and the Brazilian Real has been in free fall. Brazil is highly dependent on commodities and the recent plunge in commodity prices have hurt. Plus, Brazil is a major exporter to China and the slowing Chinese economy has hurt Brazilian exports. Another problem hitting Brazil is the rising US Dollar combined with the dropping Real will make it more expensive to pay back US Dollar denominated loans,” according to Options Express.
Brazil’s economy has been stumbling and a widespread corruption scandal has tainted state-owned oil group Petrobras. The uncertainty has also led to a Standard & Poor’s downgrade of the country’s investment-grade rating this month.
While the central bank helped provide a good boost to the Brazilian markets last week, traders warned that the bounce may be temporary, pointing to ongoing volatility in the political environment, financials and economy.
“Turning to the 3 month continuation chart, we see several very bearish signs. Over the past 3 months, the Real has been making a series of lower highs and lower lows. The 20 day Simple Moving Average (SMA) is below the 50 day SMA and the gap between them is widening. The 20 day SMA was providing resistance and each attempt to test this level has failed. RSI is a neutral 44.18,” notes Options Express.
WisdomTree Brazilian Real ETF
