Tags: ashish | advani | brazil | real | currency

Brazil’s Currency to Surge Despite Govt Obstacles

By    |   Wednesday, 23 Feb 2011 09:53 AM

The world of business seems to be settling into a cyclical funk this week.

We recently have seen the developed markets (DM) indicate extreme doubt about the emerging markets (EM). And a lot of the sell-off we observed in Asia is based on sentiments rather than facts.

I have been bringing you news about the growth story continuing to remain strong across Asia. And this continues even as we speak.

Singapore just announced its Q4 2010 GDP growth at 12 percent. Although we did observe a slightly weaker Taiwan GDP than global expectations, you were well informed when I had cautioned you months ago about the potential softness in the Taiwanese markets.

So after several weeks of weakness in Asian stock markets, we may have seen the last of the cyclical selling.

I have observed strength across Japan, Hong Kong, Shanghai, Australia, India and other Asian bourses. I do believe the cycle is now turning and we will see the rise of the markets in Asia again and a simultaneous weakening of the U.S. dollar.

Today, I want to speak to you a country I admire but have been very disappointed in regarding the current trend of its central bank and its new president.

I am talking about Brazil and how the government as well as the central bank is wasting precious foreign exchange reserves in trying to manipulate the exchange rate and how I believe the intervention is now a failed policy.

When considering investment overseas, one important consideration an investor should view is the trajectory of the currency exchange rate in conjunction with the investment potential in the foreign market.

You see, true diversification is not just investing in foreign markets, but also diversifying out of the U.S. dollar.

Brazil has a very strong economy and is growing rapidly.

Brazil has a strong export base and China’s demands play a very prominent role in Brazil’s growth story. And just as the world is warming up to this cozy symbiotic relationship and investing to capitalize on this trend, Brazil’s Central Bank decided to attempt to spoil the party. And to make matters worse, the newly elected president has claimed to bring the exchange rate down as an election promise.

I honestly believe this will be another failed election promise.

Brazil has a rapidly growing economy and is not free from the forces of inflation. While nothing like Asia, the inflation rate is 6 percent as of January 2011. And the Celic (central bank's overnight ) rate is 11.25 percent.

The interest rate differential is very attractive and this was leading to a soaring Brazilian currency, the real.

While this would create some hardships in the short run, the Central Bank decided to artificially control the exchange rate via direct intervention (selling reals, buying dollars) and weakening the local currency.

When this did not work, they introduced a tax on international investments in Brazil. They hoped this would slow down foreign money inflows.

While this worked for a couple of months, the growth rates and business opportunities in Brazil cannot be stifled by interventions, taxes on international funds and other fake short-term measures.

The true strength of the economy and the high interest rate will win each time and the real will strengthen.

Instead of embracing the strong currency and using it as a weapon to fight inflation in the country, Brazil’s Central Bank, foreign minister and the new president are wasting valuable resources and time in fighting the tide and the inevitable.

To me, this is a disastrous foreign exchange policy that is destined to fail. In my long history as a currency trader, if you fight the trend, you will lose more than you win.

Embrace the fundamentals and you will win most of the times.

The Brazilian fundamentals are strong and this will lead to a stronger currency. No questions.

You can buy the real using ETFs and invest in FDIC protected CDs in the United States. It would be wise to ensure that a small portion of your investment capital is dedicated to the Brazilian real.

Ensure that you participate in the high interest rate you can when investing into this gem of a currency.

A word of caution: The real could be volatile and you should have a longer-term view.

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Advani
The world of business seems to be settling into a cyclical funk this week. We recently have seen the developed markets (DM) indicate extreme doubt about the emerging markets (EM). And a lot of the sell-off we observed in Asia is based on sentiments rather than facts. I...
ashish,advani,brazil,real,currency
715
2011-53-23
Wednesday, 23 Feb 2011 09:53 AM
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