Brazil Bull Rolls Again

The iShares MSCI Brazil Index (ETF) (NYSE:EWZ) was one of 2016's best-performing single-country exchange-traded funds, but as was the case with many emerging markets ETFs, EWZ wilted in the fourth quarter as financial markets digested the results of November's U.S. presidential election.

Bravo, Brasil!

However, Brazilian stocks and EWZ are off to strong starts in 2017. The largest ETF tracking Latin America's largest economy is higher by more than nine percent to start the new year and there are signs some traders are comfortable betting on more upside for the benchmark Brazil ETF.

EWZ continues to be strong in the face of challenges for Brazilian banks, the ETF's largest sector exposure. Challenges for Brazilian banks stem from what is becoming a familiar issue from Illinois to Greece: public pensions. Cash-strapped Brazilian states are now delaying doling out benefits to pensioners, potentially crimping banks that previously rushed to lend to this segment of the Brazilian population.

Add to that, banking issues are starting to creep up again. As Benzinga reported late last year, a problem for EWZ is weakness in Brazilian bank stocks, which is particularly problematic when considering the sector's issues against the backdrop of some of the developing world's highest interest rates. To be fair, the path of least resistance for Brazilian borrowing costs, as highlighted by two rate cuts late last year and a larger-than-expected cut this month.

EWZ March 40 calls have traded in good size this week, and EWZ received a nice lift yesterday [Wednesday] in a volatile session. Thus far today [Thursday], its following through rather strongly, with an additional >0.7 percent surge, now trading at its highest levels since last November, said Street One Financial Vice President Paul Weisbruch in a recent note.

Bulls For Brazil

Bullishness for Brazilian stocks has been a boon for the Direxion Shares Exchange Traded Fund Trust (NYSE:BRZU) as well. Entering Thursday, BRZU was the second-best performer among Direxion's leveraged bull ETFs on a month-to-date basis. BRZU looks to deliver triple the daily returns of the MSCI Brazil 25/50 Index.

The real story, however is likely the surprise policy move that the Brazil central bank unleashed into the market yesterday morning where they slashed interest rates by 75 basis points. Most analysts were expecting a more modest 50 basis point cut, added Weisbruch.