Well, Brazil responded to President Trump’s threat of 50% tariffs, if they do not stop the “Witch Hunt” against Jair Bolsonaro, the ex-President who allegedly initiated a coup against the present government. Both the President and the Supreme Court pushed back. The Supreme Court’s opinion was unanimous.
If we look at the situation rationally, pushing back may reflect a Brazilian position of strength. First, the US has a trade surplus with Brazil (US sells more dollar value to Brazil than Brazil sells dollar value to America). Sanctions would harm this balance by cutting back on US sales to Brazil. The whole point of tariffs is that other nations are ripping the US off, as determined by a trade surplus with the US. If the US has a surplus with Brazil, is the US ripping Brazil off? Second Brazil is united against the US and President Trump’s threat; in a Brazilian poll, 50.3% of respondents view Trump’s move as an attack on Brazil’s sovereignty. When asked should Brazil retaliate with tariffs if the US applies them, 51.8% of Brazilians said they should hit back. 61% of poll respondents said Trump’s decision to target Brazil is unjustified
Without knowing it, President Trump may have given a gift to President Lula; Lula’s approval rating went from 47% to 49%.
So, the Brazil public is digging their heels in, steeling for a fight, the Supreme Court has weighed in, and public consensus is for retaliation.
What does this mean for investing in Brazilian stable bonds or the currency?
Well, quite a bit. On the day President Trump threatened tariffs regarding the treatment of Jair Bolsonaro, the Brazilian Real weakened 2% to a level of 5.57. This is where the currency is now. The first knee-jerk reaction of weakness was the only one.
This makes Brazilian tokenized bonds, like the short-term Tesouros offered by Etherfuse very attractive when compared to short term US bonds. Etherfuse Tesouro yields 13.06%, and short-term Etherfuse US bonds yield 3.93%. Thus, the yield pick-up from owning Brazilian bonds is 9%. Even if the US dollar fiat-based short-term bond is used, the yield pick-up is 8.75%.
Thus, Tesouros offer a great yield when compared to US dollar yields. That said, this risk as always is that the US dollar appreciates significantly and wipes out the yield differential. For this to happen the US dollar would have to go up almost 9% versus the Brazilian Real, to a level of over 6 Real to the USD. The last time the Brazilian Real reached the 6 level was in April when the first round of US tariffs was announced. That was a bad time for all foreign currencies, and probably the worst levels, given that US tariffs have not had a harsh impact on currencies.
The Brazilian currency may weaken from here as the fight with the US heats up, but 9% is a stretch.
The key to this trade is whether President Trump follows through on the threat of 50% tariffs, tariffs that are more driven by emotion then economics. If the tariffs come out, Brazil will probably hit back with something harsh. It could get ugly for no economic reason whatsoever.
But, ugly or not, a 9% yield pick-up versus US dollars seems a good bet.
This blog is for educational and informational purposes only, covering general market trends, industry developments, and asset features. Nothing herein is investment advice, a solicitation, or a recommendation to buy or sell any assets. Etherfuse and its guests may hold stakes in some or all of the assets discussed.
This blog is for educational and informational purposes only, covering general market trends, industry developments, and asset features. Nothing herein is investment advice, a solicitation, or a recommendation to buy or sell any assets. Etherfuse and its guests may hold stakes in some or all of the assets discussed.
