Well, President Trump followed through on his highly emotional threat and raised tariffs on Brazil to 50%. He did this citing “an unusual and extraordinary threat” . This extraordinary threat is the domestic trial of ex-President Jair Bolsonaro, an issue that is purely a Brazilian matter, no business of the US.
It is hard to see how a trial of an ex-President is “an extraordinary threat”. Brazil does not share a border. There is no risk of an immigrant crisis. Civil war is not about to break out.
In the end the tariffs seem to be a big “Nothing Burger”. Many sectors are exempt. The stock market went up 1% post announcement. The Brazilian Real weakened .18%, which is basically a rounding error. And the Brazilian ten-year bond was unchanged.
It is important to mention the moves in bonds, stocks, and the currency. They are the great sources of interpretation as to how these tariffs will impact Brazil in the future. Spoken opinions and sound bites do not communicate the impact as well as numbers, markets.
The muted reactions are surprising. Normally such tariffs would have sent the currency on a downward path. The stock and bond markets would have cratered in price terms.
Given the whimper as opposed to bang of US tariffs on Brazil, it makes sense to reiterate the trade favoring Brazilan Etherfuse Tesouros versus the US bonds and currency. The news is out, and the price reaction was minimal.
To re-cap, the Etherfuse Brazilian Tesouro yields 13.06% and the US yields about 4.34%, an 8.72% yield pick-up, a good carry trade.
In a yield pick up trade the goal is for nothing to change in the currency or interest rates. You want the situation to carry on as it is. If a 50% tariff doesn’t cause change in the currency or interest rates, it is hard to imagine what will.
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