One concrete example where the recent sharp drawdown in the FX rate may herald better times ahead is in Brazil. As in most other emerging markets, a weaker currency is a double – edged sword. If it happens too quickly it can cause a run on FX reserves and add to inflation risks.
On the other hand, sharp currency drawdowns have almost always been associated with short-term bottoms in the equity market in Brazil and, on a longer-term basis, USDBRL provides a good lead on the Brazilian trade balance. The BRL is down more than 50% against the USD in the last 2 years and , in many ways, this may be just what Brazil needed to re gain lost competitiveness.