Is uncertainty better than negative certainty? This is the basic premise behind some rather unsettling charts that Business Monitor International recently put together showing the Mexican peso-Brazilian real cross rate. You know, it’s funny, for all the bellyaching that Latin Americanist geeks do about these two countries, very rarely does anyone bother to compare their currencies. And as the two countries in the world where I’ve spent the majority of my time since the millennium (does anyone even use the phrase “Y2K” anymore?), I’m finding these charts very thought provoking.
To begin with, so that we’re clear on biases, I find both Brazil’s growth story and Mexico’s stability story to be way overhyped. Which one is relatively more overhyped is what is in question here.
This is not to say there aren’t qualified leads in either country offering market-beating returns, just that sooner or later the limited shelf life of each country’s “bubble” is going to manifest.
Without looking at the charts, if I had to guess, I would have thought the increased tourism traffic from the forthcoming World Cup and Olympics would keep the real strong over the longer-term, which would imply that the longer-term chart, shown below, is showing a temporary pullback:
To the extent that this is not the case, or to the extent that Elliott Wave Theory has any credence at all to it, this is looking like a market top, which means the Brazilian Bubble is really coming to an end.
Yes, the risks are higher for Brazil than for Mexico, and yes, the technical and fundamental argument against the real is a strong one, but the problem with saying it this way is that it makes it too easy to gloss over the risks facing Mexico and the peso. And I’ve generally found over the years that people make a point of doing exactly this when it suits whatever argument they’re trying to support, which to me is self-defeating in the end.
Technical analysis aside, I had to do a triple take to make sure I was seeing this correctly, but yes, I guess there was a time in the past decade when MXN/BRL was at 3.0, and I do reckon that time would have been exactly at September of 2002. This raises the question of how much better off Brazilians overall have become than Mexicans in the past decade. Or how much real (in the economist’s definition of that word) growth Brazil has had relative to Mexico in the past decade. The answer: probably not enough to justify the corresponding run-up in MXN/BRL.
Put another way, reading between the lines, what the trip MXN/BRL took from 3 to 8 is all about is the peso’s obvious correlation with the US dollar. But here’s the thing–you compare Brazil against, say, Korea and China, as Marcus Nunes did over the weekend, and the underlying story to me becomes even starker, and that is this:
Forget the official data–Mexico isn’t growing. Pockets of Mexico are growing and a confident cadre of monopolists is profiting, but other pockets of Mexico are totally falling apart. That MXN/BRL is set to take a dive is not evidence of Mexico’s bright future any more than a political victory is evidence of a mandate. All it shows is that voters disliked you less than the other guy.
