Possible Responses to the Uncertain Future of Brazil

The economic situation in Brazil has been divisive for forecasters, with investors uncertain of whether the growth of the global economy will pick up. Some analysts are calling for an increase in growth in H2 of 2013 while others remain skeptical of China's ability to get through the recent cash squeeze. One scenario is that China will be able to transition with minimal difficulty, allowing the recovery of Brazil to hasten and bring more economic certainty. This would contract the spread between Brazil's dollar denominated bonds and the US Treasury bonds, making the option to buy Brazilian bonds and short the US Treasury bonds a possibility. The scenario of China's slowdown lasting longer than anticipated and the impact of the US tapering of QE hitting Brazil harder than people think is very real and due to that, the second scenario offers the possibility of shorting the iShares MSCI Brazil ETF, which was down 16.3% last quarter and could slide much more without a turnaround in sight.