US Dollar bull market ahead of us?

Release Date: 04 January 2015


Table of Contents

Highlights   Fundamentals     Indicators   REITs


The capital markets didn’t want Dilma Rousseff as Brazil’s president, but that’s what they got. The market consensus in Brazil is that 2015 will not be a good year.

US Dollar bull market ahead of us? If the current trend holds true, dollar appreciation has already begun, affecting the Brazilian real.

Vacancy rates in Brazil’s office real estate rose in the third quarter of 2014. Despite higher office vacancy rates, Brazil’s commercial real estate continues to outperform CD rates.


The capital markets didn’t want Dilma Rousseff as Brazil’s president, but that’s what they got.

After winning the tightest presidential election in recent memory this past October, Ms. Rousseff was sworn in for her second four-year term on January 1. During the campaign, capital markets supported her rivals in response to Rousseff’s populist and interventionist policies. Following the election, Rousseff has attempted to address these concerns by appointing orthodox names to the Ministries of Finance and Planning.

Although her political party has been plagued by corruption scandals, millions of people have been lifted from poverty over the past ten years, and the government handout program (Bolsa Família) for poor families is very popular. Rousseff’s continuity in the presidency is likely a direct result of such efforts.

US Dollar bull market ahead of us?


The prospect of rising interest rates and the end of quantitative easing in the United States have prompted expectations of a US dollar rally in the next few years. The dollar spike between 1980 and 1985 after former Fed chairman Paul Volcker raised interest rates in the late 70s certainly sets a strong precedent for a rise in the dollar.

This sentiment has been underscored by the divergence in monetary policies between the Fed and the central banks of important US trade partners. Both Japan and Europe have initiated their own versions of quantitative easing, strengthening the trend.

The currency wars continue.

Source: OANDA, Mauldin Economics

If the current trend holds true, dollar appreciation has already begun, affecting the Brazilian real.

DXY, a measure of the value of the United States dollar relative to a basket of foreign currencies, has rallied since September of 2014. So has the US dollar relative to the Brazilian real. In 2014, the DXY gained 12.8 percent, and the USDBRL rose 12.5 percent.

Despite a potentially bumpy ride, Brazilian markets have viewed the depreciation of its currency favorably. The minutes of the most recent monetary policy committee meeting (Copom) of the Central Bank of Brazil detail the expectation that higher growth from major trading partners and the depreciation of the real tend to benefit exports.

The most recent market survey published by the Central Bank of Brazil (on 26 December 2014) predicted that the real would end 2015 at R$ 2.80 a dollar. This is now the ninth week in a row that analysts have revised their expectation upward, suggesting that initial prognoses were too conservative.

Source: CNBC, Central Bank of Brazil

US vs. Brazil GDP growth prospects in 2015


International markets have been forecasting that high-income countries will carry the global growth torch in 2015, as emerging markets experience economic adjustments (Russia and Brazil, for example). The US economy is now more likely to show greater economic results after surprising positively with its 5.0% GDP growth in Q3 2014. The US growth rate for 2015 is presently expected to fall between 2.5 and 3.0 percent.

Former Federal Reserve chairman Alan Greenspan, however, recently reminded on Bloomberg that although the US is indeed doing better than its peers, there are still indications of a weak recovery. He doesn’t believe the US will grow above 3.0 percent in the fourth quarter of 2014.

As for Brazil, the domestic consensus is that 2015 will not be a good year. Some analysts have no hope of an economic reaction, and have simply scrapped 2015. Analysts in aggregate have downgraded 2015 growth prospects for several weeks in a row, with the most recent survey showing that economists reforecast a growth rate of only 0.55 percent. However, there are expectations that manufacturing, which is responsible for a quarter of the overall economy, will fare better than services, which had done well in previous years.

One of the big questions is the oil company Petrobras, which was expected to inject billions of investment money into the Brazilian economy. The Petrobras oil reserve findings, originally considered a godsend for the economy, are no longer as viable in today’s circumstances. Under current oil prices, oil prospecting might simply be uneconomical.

Source: IBGE, US Bureau of Economic Analysis


Despite higher office vacancy rates, Brazil’s commercial real estate continues to outperform CD rates.


After a surge in yields between 2005 and 2010, Brazil’s commercial real estate market has returned to pre-euphoria figures. The year-over-year commercial real estate index (IGMI-C) has declined from its peak at 30.1 percent in Q3 2009 to 15.4 percent in Q3 2014, below the historic rate. This is nonetheless still better than annual CD rates, which are around 10 percent.

IGMI-C, which is reported by Instituto Brasileiro de Economia – Fundação Getulio Vargas (FGV/IBRE) on a quarterly basis, is a total rate of return composite that measures the investment performance of Brazilian commercial real estate (It resembles the United States’ NCREIF Property Index). The IGMI-C consists of three components of return: income, capital, and total. Methodology is based on similar international indicators, which makes it possible both to benefit from the experiences of other countries and to compare results.

Source: FGV/IBRE, Central Bank of Brazil,


Vacancy rates in Brazil’s office real estate rose in the third quarter of 2014.chart05Source: GB – GilverBook, JLL – Jones Lang LaSalle

Vacancy within the most negotiated publicly traded office REITs1 inched up in the third quarter of 2014 compared to the same period the previous year, with the estimated vacancy rate on an aggregate basis (total vacant area over total area) rising from 6.9 to 9.8 percent. This rate is still below the rates for São Paulo and Rio de Janeiro, where most of the real estate is located. The median of the vacancies has risen from 3.0 to 4.7 percent for the same period – that is, half of the funds analyzed sport very good rates but a handful of outliers have skewed the overall data.

This increase can be explained mostly by the increase in vacancy at BC Fund (BRCR11), which holds by far the largest leasable area at 288,922 square meters. The BC Fund vacancy rate rose to 10.4 percent in September of 2014, from only 1.4 percent in September of 2013. This past September the fund reported that approximately nine floors of its Eldorado Business Building in São Paulo’s Berrini district had been vacant since March 2014. At the end of November, they announced in a press release that three and a half floors had been leased, decreasing the fund’s overall vacancy rate to 8.3 percent.

FII Tower Bridge Office (TBOF11), FII Cyrela Thera Corporate (THRA11B), and Cyrela Commercial Properties (CEOC11B), which have not announced any lease agreements, also account for a significant portion of the vacancy. The Tower Bridge Corporate and Thera Corporate buildings are situated in São Paulo’s Berrini district, and the Corporate Executive Offices (Cyrela Commercial Properties) are located in Rio de Janeiro’s Barra da Tijuca district.

[1] Office real estate funds that compose the BM&FBOVESPA’s Real Estate Investment Fund Index – IFIX on November 28, 2014. PRSV11, FLMA11, and XTED11 were not included in the analysis due to lack of information.

Source: BMF&Bovespa

Written by Heli Brecailo

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