Carnival of Returns
Unmasking Brazil's Carry Trade Potential

Date of publishing: 07.08.2023

Executive Summary

  • Swiss economy shows resilience
  • Swiss GDP growth consistent, 0.8% in 2023
  • Brazil’s strong Q1 2023 GDP growth at 4%
  • Swiss borrowing costs are low, Brazilian yields are high
  • Carry trade opportunity: CHF/BRL, stable Switzerland, growing Brazil
In this article, we explore the divergent economic paths of Switzerland and Brazil, analyzing their fiscal policies, inflation management, and GDP growth rates. Switzerland impresses with strong economic performance and effective inflation control, while Brazil surprises with robust GDP growth in Q1 2023. Additionally, we will explore a carry trade opportunity between the Swiss Franc and the Brazilian Real, examining key factors influencing the currency pair and offering statistical evidence to support its viability.


The Swiss economy has consistently demonstrated a strong performance in managing inflation over the past 2 years, particularly when compared to global averages (see figure 1). As of June 2023, inflation stood at a manageable 1.7%, cooling from 2.2% in May 2023 and significantly down from the 3.3% witnessed in January of the same year. The strong performance can be attributed to several factors such as the robust Swiss franc, effective pricing controls and resilient supply of energy.[1]
Figure 1: Switzerland GDP Growth Rate & Inflation Rate (2018 – E2026)[2][3]
The Swiss National Bank (SNB) has adopted a proactive policy stance since mid-2022, orchestrating a series of rate hikes to maintain inflation within the target range of 0% to 2% (see figure 2). The most recent hike, in June 2023, elevated the policy rate to 1.75%. While this maneuver may initially seem counterintuitive given the stable inflation numbers earlier in the year, it reflects the bank’s strategy to pre-empt potential inflationary pressures. Despite the encouraging numbers in June 2023, the expectation is that medium-term inflation will surpass the target, hovering at 2.2% in 2024 and slightly easing to 2.1% in 2025. This uptick is largely attributed to concerns around imported inflation and the potential impact of rent hikes and electricity prices. As a result, the SNB is hinting at further potential rate hikes in September of 2023.[4]
Figure 2: SNB policy rate (2021 – 2023) [5]

The Swiss Gross Domestic Product (GDP) growth paints a picture of positive consistency, marking its 8th consecutive quarter of growth in 2023. However, the growth rate for the year stands modestly at an expected 0.8%, somewhat subdued compared to previous years [3]. The Swiss economy is projected to bounce back with a stronger growth outlook over the next few years, with forecasts above 1% (see figure 1). In June 2023, the Purchasing Managers Index (PMI) was reported to be 44.9, suggesting a contraction in the sector since the beginning of the year. Despite the contraction, the outlook for the rest of 2023 remains optimistic. [Bloomberg Finance L.P.]

The Swiss bond market, however, presents an interesting anomaly in the form of an inverted yield curve, a situation where long-term debt instruments have a lower yield than short-term ones. As of the beginning of July, the 10-year versus 2-year bond spread stands at -21.4 basis points [6]. An inverted yield curve is often perceived as a harbinger of economic downturn, but it’s important to remember that it’s one of many indicators and not a definitive prediction tool. Given Switzerland’s solid economic fundamentals, it’s possible that this inversion might not portend a recession but could rather reflect the central bank’s proactive interest rate policies. Combining the previous indicators, the outlook regarding future economic growth in Switzerland remains mixed yet leaning towards growth, with the assumption of no additional bank failures.

In the sphere of public finance, Switzerland presents a compelling picture of disciplined fiscal management. The nation’s debt-to-GDP ratio, which stood at the comparatively high end in 2020 at 43.3%, has been on a downward trajectory. As of the present, it stands at 41.4%, and is projected to further decline to 37.5% by the end of 2023. This declining trend underscores the government’s commitment to fiscal sustainability, despite external challenges and uncertainties.[7] [8]


As for the Brazilian economy we can observe high GDP growth for the first quarter of 2023 of 4%, trumping estimates of a mere 1.5% growth. This led to the Brazilian Central Bank (BCB) revising growth expectations for 2023 from 1.2% in March to 2% in June, being slightly below expectations of private economists of 2.2%. Looking at the short- to medium term future it can be exhibited that growth rates until 2026 are expected to be not below 2% YoY. (see figure 1)
Figure 3: Nominal Brazilian GDP, GDP Growth Rates (2018 – 2026E)

A key driver of strong GDP data in Brazil are the resilient export numbers for 2022, prompting an all-time high of 334.5 bn USD in total exports, with the main export goods being soybeans (20%), crude oil (16%), iron ore (11%), and corn (6%). Especially China’s reopening from its strict Zero-Covid-Policy lead to a spike in the demand of predominantly soybeans of which China is a big importer, leading to a 44.3 bn USD trade surplus for Brazil with China, its most important trading partner. In total, Brazil was able to accomplish a 61.8 bn USD trade surplus, with other main trading partners being the US, Argentina, and the EU. [Bloomberg Finance L. P.]

A strong labour market with an 8.5% unemployment rate, which is comparatively low for Brazil – a country used to seeing low two-digit unemployment figures – [1], and further receding inflation with the latest June data for 2023 of 3.16% again undercutting its previous two-year low of 3.94% in May underscore the strong Brazilian economy. However, borrowing costs are unusually high, with the BCB Selic rate – the central bank’s interest rate – being unchanged at 13.75% since August 2022, albeit inflation below the target of 3.25% for the first time this year (2023). (See figure 2)
Figure 4: Brazil Selic rate, inflation rate, inflation target (06/2013 – 06/2023)
Those high rates are beneficial for our Currency Carry Trade, but are increasingly a strain on the Brazilian economy, which may explain the slight contraction of the PMI in May to 47.1, an indicator undermining the previous positive outlook. Contrary to Switzerland, there is no inversion of yields between 2-year and 10-year bonds, with a +63-basis-point spread, i.e., the 10-year bond yielding 63 bps more. However, there is a strong inversion between short-term 3-month and 10-year bonds (-283 bps), which generally can be considered as an indicator pointing at a recession (see figure 3). [Bloomberg Finance L. P.]
Figure 5: Brazil Yield Curve

Because of the persistently high borrowing costs, which are a challenge for Brazilian businesses and households, President Lula has attacked the BCB for not lowering interest rates, though it is expected that rates will be lowered starting with the next meeting of the BCB board in September. Expectations see rates being cut to 12.5% by the end of the year. [4] Generally speaking, political conditions in Brazil are stable, which is one factor contributing to the attractiveness of Brazil among emerging economies for investors. Accordingly, foreign direct investments (FDIs) have been at a 10 year high in 2022 at 90.6 bn USD [5] .

Among Latin America, Brazil’s debt levels are on the higher end. For 2022 the Debt-to-GDP-ratio stood at almost 86%. Without budgetary reforms the International Monetary Fund (IMF) expects an increase of 9 percentage points to 95% government indebtedness by 2026 [6]. In order for that not to happen, which would be especially unsustainable in times of high interest rates, the Lula administration drafted a budget proposal likely to get approval from parliament, which seeks to reconcile the budget and reduce the deficit over time [4] . Markets approved of the measure, with S&P Global Ratings lifting the debt outlook of Brazil from stable to positive [1] .

Currency pair CHF/BRL

Figure 6: Historical Chart CHF/BRL (Source: Bloomberg L. P.; Yahoo Finance)

Looking at the historical chart of the currency pair (Figure 4) CHF/BRL [7], a continuous upwards trend can be seen, meaning that the Brazilian Real as the quote currency depreciated against the Swiss Franc. In this 10-year observation period some major events can be noticed. First the heavy economic crisis in Brazil starting from 2014 which let the Brazilian real slip. It was also combined with the most severe recession Brazil has ever seen. This was mainly due to historically low commodity prices and a high focus by the Brazilian government on the domestic market, which made Brazil relatively susceptible for domestic crises [8]. Exports could not balance out the domestic problems Brazil was faced with.

This was followed by a short period of about 1 year till 2017 in which the Real got stronger again. Since then, the country faced political uncertainties, which again let the Real depreciate continuously through the following 3 years until the Covid-Pandemic hit. With Covid the Real weakened by over 30% towards the Swiss franc. Since then, the pair was relatively stable, moving around 5.5 BRL per CHF.
Figure 7: Closer look on CHF/BRL for 2021 till 2023 with movers (Source: Bloomberg L. P.; Banco Central do Brasil)

If one takes a closer look at the timeframe of January 2021 until today (see figure 5), the influences of interest rate hikes and GDP growth can be seen. With a higher GDP growth for Brazil anticipated in the first months of 2021 the Real appreciated against the Swiss Franc. Followed by lower anticipated GDP figures the Real weakened again. Note that the interest rate hikes of the Brazilian central bank occurred during this time, so it could therefore be assumed that GDP figures have higher influences than the rate hikes themselves, which is quite remarkable – there will be a closer look on this circumstance in the next section.

With GDP figures stabilizing in positive territory and thus no recession expected in the near future, the positive effect of the interest rate hikes on the BRL outweighed that of the GDP. In January of 2022 the Real appreciated over 20% mainly due to the rate hikes by the Brazilian central bank till June of 2022. In July of 2022 the Swiss central bank started their restrictive monetary policy and therefore the CHF got stronger again. Since January of this year the currency pair is flat and so is the forecast of the pair – even with some upside potential within our investment horizon [Bloomberg Finance L. P.].

Currency pair movers (1)

The historical movements of a currency pair depend on certain underlying variables of the everchanging economic landscape. Unravelling the key currency pair movers can help seize the lucrative trading opportunities and capitalize on the fluctuations of the foreign exchange market.

In traditional view, domestic currency tends to appreciate with the hikes in interest rates, highlighting the special role of interest rate differential in identifying the movers in question. The situation for Brazil in this regard is a sharp CPI decrease in May with resilient core inflation, fostering a discussion about raising the inflation targets above the current 3% in the end of June and pushing a rate cut after a long hiking phase. The interdependent nature of fiscal and monetary policy links the monetary tightening cycle to the newly introduced fiscal policy: the aim to cap the public spending adds substantial optimism to the inflation forecasts despite being limited by the rising levels of sovereign debt. An obstacle on the way to pivot are unanchored inflation expectations, driven up by political uncertainties. Therefore, the Central Bank of Brazil has to wait for a drop in at least long-term prognosis to proceed with a cut decision. All in all, while the market participants expect no easing measures throughout the summer, a 75-100 basis point cut is to be expected until the end of the last quarter of 2023.

The long-term inflation target of famously economically stable Switzerland is rather strict at 0-2% p. a., emphasizing the concern about the current inflation expectation at 2.2% for 2024 and 2.1 for 2025. The last interest rate hike left the rate at 1.5% for some time (see Figure 6), until a 25-basis point hike has occurred on June 22, making the way for another one in autumn.
Figure 8: Annual inflation rate of Switzerland against the SNB policy rate 2019-2022 (Source: Bloomberg L. P.)
The outlook on the interest rate environment is quite unfavorable for the trade. However, the analysis of the historical co-movement of the currency pair with tightening and easing cycles of both countries show only a slight relationship, which gives a potential of the key movers finding themselves beyond interest rates.

Currency pair movers (2)

The currency pair movements are strongly tied to the health of national economies, leaving a significant portion of variability to be explained by economic indicators. One of the factors crucial to analyzing the interplay between the Brazilian real and Swiss franc is the growth rate of GDP, which has historically had a big impact on the strength of the respective currencies. A quick look at the quarterly GDP growth (see Figure 7) rate statistics for Switzerland and Brazil over the last several years shows the recent trend of the GDP growth of Brazil overtaking the Swiss by a substantial percentage, making way for a favorable direction of the currency pair development. Another factor beneficial for the Carry Trade reveals itself when comparing the trade balances of the countries in US dollar (see Figure 8). Having historically moved in the same directions, the net exports values of the two countries have recently parted ways. Over the course of 2022 and 2023 the Brazilian net exports have been gradually increasing, while Switzerland experienced a reduction of the trade surplus. The widening of the positive Brazil/Switzerland net exports gap enhances the prospects of Real gaining strength against the Franc.
Figure 9: Comparison of quarterly GDP growth rates of Switzerland and Brazil (Source: Bloomberg L. P.)
Figure 10: Comparison of the Swiss and Brazilian trade balance over 5 years (Source: Bloomberg L. P.)

One of the important factors to consider is the nature of the currencies themselves. The Brazilian real, among many emerging markets currencies, is a so-called “soft currency”, which is known to fluctuate against the US dollar. The slacking outlook on the world’s most traded currency is of assistance to the boost of the Real. The Swiss franc, in turn, is famous for its “safe haven” properties, which implies significant demand increases and subsequent appreciation in periods of crises and uncertainties. Therefore, unless the critical situations occur, it makes sense to expect a relatively stable market value of the Swiss franc.

The interest rate environments of the two currencies throw a shadow on the empowerment of the Brazilian real against the Swiss franc. However, the strength of the Brazilian economic fundamentals in relation to the Swiss is to offset the negative interest rate influence on the currency pair and ensure a positive currency pair outlook for the Carry Trade.

In conclusion, the macro analysis reveals intriguing prospects for a potential carry trade between the Swiss Franc and the Brazilian Real. Switzerland’s stable economic performance and proactive inflation management present an attractive borrowing opportunity, while Brazil’s impressive GDP growth and high interest rates offer high yields. By carefully considering the economic fundamentals of both nations and understanding the factors influencing the currency pair, we uncovered an opportunity to capitalize on the promising prospects of this trade.

The Trade Idea

At its core, the carry trade involves borrowing in a low-interest-rate currency and investing in a higher-yielding currency, bagging the interest rate differential as profit. This strategy has been a popular choice among traders, as it allows them to generate income by leveraging interest rate disparities between countries.

The CHF and BRL, representing the Swiss Franc and Brazilian Real respectively, stand as two distinct currencies offering unique characteristics that make them an attractive pair for carry trade opportunities.

(1) Swiss Franc (CHF): Known for its reputation as a safe-haven currency, the Swiss Franc is often sought by investors during times of global economic uncertainty. Switzerland’s robust economy, political stability, and sound monetary policy contribute to its appeal as a low-risk currency. Additionally, the Swiss National Bank’s traditionally low-interest-rate policy (currently at 1.75%) serves as a great borrowing opportunity for this carry trade.

(2) Brazilian Real (BRL): As the currency of one of the world’s largest emerging markets, the Brazilian Real presents an intriguing case for carry trades. As elaborated on before, Brazil boasts a diverse and resource-rich economy, offering significant growth potential. Furthermore, the higher interest rates set by the Central Bank of Brazil (currently at 13.75%) provide an attractive risk-free yield.

Trade Structure for CHF/BRL Carry Trade

1. Borrow CHF: We begin by securing a loan denominated in Swiss Francs (CHF). This can be obtained from a financial institution or through a currency exchange platform that offers borrowing facilities.

2. Exchange CHF for BRL: We then convert the borrowed CHF into Brazilian Real (BRL). This step involves selling the CHF and purchasing an equivalent amount of BRL at the current exchange rate of 5.333.

3. Invest in Brazilian Government Bonds: In step three, we allocate the converted BRL funds into Brazilian Government Bonds. These bonds are issued by the government of Brazil and offer fixed interest rates over a specified period. We chose a bond with a maturity date that aligns with our desired investment horizon of one year. Therefore, bond duration can be disregarded, and the interest rate risk is almost diminished.

4. Collect Yields at Maturity of the Bond: We then hold the Brazilian Government Bonds until maturity (July 1, 2024). At this date, the bond will be taken back at par amount, which will leave us with an approximate yield of 12.09% p.a.

5. Exchange BRL for CHF and Settle the Loan: Once the bond reaches maturity, we exchange the accumulated Brazilian Real back into Swiss Francs. Finally, we settle the CHF loan by repaying the borrowed amount, including any accrued interest. The remaining amount, gained from the interest rate differential or the strengthening of BRL, is our profit for this trade.

Statistical proof

In order supplement our research for the validity of this trade with statistical proof, our team conducted a Monte Carlo simulation. We based it on the ten-year historical price data of the currency pair and the volatility and mean return values were drawn out of rolling quarterly performance.

The Monte Carlo Method:

Monte Carlo simulations are a statistical concept which, in a financial context, aims to predict future fluctuations and developments by using historical volatility and mean return of the underlying asset over a given time period. Based on those, we created a random sample of 500 values/outcomes for the future. In the final step we applied them to the carry trade theme and plotted the outcome in a return histogram.
Figure 11: Return Histogram of the Monte Carlo Simulation for the Carry Trade

The chart above shows the statistical distribution of returns for the next year. The x-axis indicates the ranges of annualized returns, whilst the bars show the number of simulations (out of 500) where the respective range was achieved.

The simulation gives us evidence, that even with the volatile developments in the past ten years, the carry trade would have yielded an average return of 4.79%. The return-to-risk ratio based on the Monte Carlo results was 1.97, indicating a promising investment.

Disclaimer The information set forth herein has been obtained or derived from sources generally available to the public and believed by the authors to be reliable, but the authors do not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with WUTIS – Trading and Investment Society e.V.

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