Back Research Notes Brazil’s Moment: The Trade of the Embodied AI Era, Dollar Weakness, and Global Trade Reordering Published on June 3, 2025 By Jordi Visser Executive Summary Because of my time living in Brazil, I am always looking for top-down reasons to get long it when it is off investor’s radar. Coming into this year, I was very focused on Brazil being an AI trade due to the rise of embodied AI and the commodity and mineral needs for it. However, now that the U.S. is committed to restructuring global trade and with it, capital flows, it is apparent the dollar weakness and Asia repatriation story is real, it’s time to bring out the Brazil long trade idea as it benefits significantly from both. Brazil stands at the epicenter of a powerful global reordering. While most investors remain preoccupied with tariffs, U.S. recession risk, inflation, and long-duration bond risks, Brazil has quietly become one of the most compelling macro opportunities of 2025. This trade is driven by three major secular tailwinds: The structural weakening of the U.S. dollar and diversification of global capital flows, The next phase of artificial intelligence defined by hardware, power, and materials, not software and A global push to secure critical minerals due to the trade war between China and the U.S., where Brazil is rising fast as a strategic supplier. So far this year, Brazil’s currency has strengthened, bonds are offering one of the world’s highest real yields, and its equity market is pushing through major multi-year resistance. Yet the trade is still under-owned, largely because the biggest fears in markets right now, Brazil’s fiscal deficit and inflation have overshadowed its structural improvements. What investors are missing is that these very fears have historically been defused during past cycles of dollar weakness and commodity strength precisely the environment that is now more likely to take shape driven by the global macro tailwinds. I. From Dollar Risk to Yield Opportunity Under the Trump administration’s aggressive trade policies, the dollar is facing renewed pressure as countries increasingly look to de-dollarize. Brazil is at the forefront of this shift. Bilateral trade with China is now settled in BRL and CNY, and the BRICS bloc is building frameworks for local-currency settlements. This transformation is coinciding with a return to emerging market (EM) carry trades: Brazilian 10-year government bonds yield over 15%, far outpacing inflation. These yields reflect not crisis, but opportunity enabled by credible monetary policy, disinflation progress, and a proactive central bank. A 1% drop in the DXY has historically translated into a 2.5–3.0% appreciation in high-yield EM currencies like the BRL. In addition, over the last 22 years it has also led to MSCi Brazil rising over 4% for each 1% drop in the DXY. While fiscal sustainability remains a concern with Brazil’s gross public debt is expected to reach 92% of GDP this year, these worries are not new. Historically, periods of dollar weakness have supported Brazil’s fiscal repair by boosting capital inflows, compressing imported inflation, and improving debt affordability. II. AI’s Next Chapter: A Hard Asset Supercycle The AI story has shifted. We are now leaving behind the software era and entering a capital- and energy-intensive hardware phase: Inference models and humanoid robotics, AI-native mobile devices and full self-driving fleets, Data centers consuming more electricity than EVs. This shift is driving a new commodity supercycle centered on: Lithium, nickel, copper, graphite, and rare earths—all of which Brazil possesses in abundance. Brazil has: The second-largest reserves of rare earths, nickel, and graphite, A growing lithium export sector, And massive untapped copper and manganese resources. Brazil now sits at the center of the beginning of the embodied AI era, with the materials the world needs to scale. III. The Power Behind AI and Brazil’s Strategic Clean Energy Edge AI is no longer just about silicon, it’s about energy. Power is becoming the next major bottleneck for global compute expansion. AI-driven data centers are forecast to use 1,500 TWh of electricity by 2030. Brazil generates over 84% of its electricity from renewables: hydro, wind, and solar. This makes Brazil one of the most attractive countries on earth for AI infrastructure buildout. Microsoft, ByteDance, and others are building or expanding in Brazil, supported by government tax relief and favorable energy costs. IV. The Fears: Fiscal and Inflation but the Cycle May Help The two biggest headline concerns in Brazil right now are: A fiscal deficit projected at 8.5% of GDP in 2025, and Inflation expected at 5.65%, above the 3% target. But these concerns are cyclical, not structural. History shows they are often best addressed during periods of dollar weakness and commodity booms. In 2003–2007, Brazil’s fiscal deficit shrank below 2% of GDP while debt/GDP dropped from ~60% to ~45%. V. Technical Breakout: The Charts Agree John Roque’s Technical Read: USDBRL has broken below its 40-week average and is targeting 4.60. EWZ has reversed a false breakdown and is pushing into breakout territory. IBOV shows a long-term cup-and-handle, with targets at 154,000 and 174,000. My Takeaway (Elliott Wave Perspective): As someone who studies Elliott Wave patterns, my personal read is as follows: Elliott Wave: A 13-year bear cycle appears complete with a textbook 5-wave decline in BRL/USD. Momentum: Monthly MACD divergence + flattening histogram is a reliable historical bottom signal. Bias: Tactical bullish. A long-term reversal thesis is building. Confirmation comes on a break above 0.1850. VI. The Trade Setup Ways to express this trade: FX: Long BRL/USD or EMFX baskets with Brazil overweight Equities: Long EWZ, or direct Brazilian exposure through banks, utilities, or infrastructure Rates: Long Brazil local-currency bonds (NTNs or local bond ETFs), paired against low-yield DM debt Valuation Tailwind: Brazil’s Equity Market Is Still Cheap Brazil also has a deep and seasoned local investor base that has lived through multiple inflationary cycles. Decades of inflation volatility have shaped investor behavior, making local institutions and individuals highly sensitive to rising inflation and monetary tightening. This creates a persistent valuation discount in periods of high real rates—as is currently the case. However, that same sensitivity can create a powerful upside when disinflation takes hold. With inflation expected to fall and the central bank signaling the end of its hiking cycle, a multi-year easing regime is likely. Historically, this transition has acted as a catalyst for equity re-ratings. As real rates normalize and inflation fears recede, the valuation gap in Brazilian equities could close rapidly, offering strong upside for both domestic and global investors. Despite the structural improvements and macro tailwinds, Brazil’s equity market trades at a steep discount to both developed and emerging market peers. As of mid-2025: The Bovespa Index trades at a forward P/E of ~8.5x, compared to ~18x for the S&P 500 and ~12x for the MSCI Emerging Markets index. This valuation reflects years of underperformance during the software/tech-led cycle and macro skepticism but it creates a powerful asymmetry now as Brazil enters a regime of capital inflows and commodity repricing. With fiscal risk priced in, inflation moderating, and AI-era resource demand accelerating, mean reversion in Brazil’s equity multiples could significantly boost returns even without earnings growth. Strategic Non-Alignment: Why Both the U.S. and China Need Brazil Brazil is emerging as a key “swing state” in the new global trade and infrastructure competition a geopolitically neutral, resource-rich economy with deep ties to both China and the United States. China is Brazil’s largest trading partner, accounting for approximately 25–30% of Brazil’s total exports. Brazil