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Brazilian Real Has the Wind to its Back

By    |   Wednesday, 23 Jul 2008 12:59 PM

It's the difference between up and down, right and wrong, night and day.

Consider for a moment the Brazilian economy and the U.S. economy right now. Their economies and their currencies couldn't be more opposite from one another.

For instance, Brazil has a trade surplus. The U.S. has a trade deficit. Brazil is enjoying the boom in agricultural commodities that they produce and export. In the U.S., we're crying the blues over the high prices of food.

While the U.S. has run short on its oil supply and has to import it from other countries, Brazil just discovered possibly the largest find in the entire Western Hemisphere. They are still working on getting it from under the ocean floor, but at least they are sitting on a huge supply and, unfortunately, we're not.

They have rising interest rates while we have had declining interest rates. Keep in mind, that as far as money is concerned, it likes a higher yield.

So, as rates rise, it attracts more money to your country. When rates fall, money tends to run away to countries where the economy is on the up and interest rates on the rise.

As the interest rate differential between Brazil and the U.S. widens, it will likely attract more money towards their currency, called the real, and away from the U.S. dollar.

Brazil seemingly has everything going for it now, especially after the two latest rating upgrades on its country and banks. This allows more money to flow into the country from pension and other investment funds that, due to their internal policies, are barred from investing in any country that doesn't pass muster on risk ratings.

So, when you put all of this together, you see that Brazil has no obstacles to the flow of money into it and, by the same token, money really wants to rush into the country. It's one of the best places to seek shelter as commodities gobble up the U.S. dollar.

The Brazilian real (BRL) should stay at the top of the list of best-performing currencies until the commodities boom truly cools off. And as you can see just by looking at prices at your local gas station, this might be for a while.

While oil may pull back here and there away from $146 a barrel and cool off a bit, and even if goes to $100 or $120 a barrel, that's enormously expensive, not to mention a huge drag on the U.S. economy.

I say the USD/BRL currency pair will continue to decline for some time to come. The U.S. Federal Reserve is not likely to raise interest rates until after the November election. You might not see them increase rates until the December meeting or maybe even later.

They should be fighting this runaway inflation right now. But I've learned that what the Fed should do and what it does end up doing can be two different things. They should suck it up in the near term and hike rates and kill off the excessive inflation, which would help our long-term good.

But what do we do here in America? We live for today and worry about tomorrow later. I think this type of thinking permeates the Fed sometimes, too.

This gives the USD/BRL the green light for at least five to six more months, if not more than that. If the commodities boom continues on even longer, the real could continue to outpower the buck.

So, while the dollar is weak, the perfect candidate against it is the Brazilian real. So far, the real has rallied a full 12 percent this year against the dollar, and there should be more where that came from.

When the Fed finally does start hiking rates, the dollar could stabilize and recover. But, once the buck recovers a bit, I'd not buy it against the real but against something that could be very weak against it, such as the Japanese yen.

For when the dollar does finally rally after the rate-hike cycle starts in the United States, it could be short-lived, but the buck would nevertheless rally the most against a low-interest yielding currency like the yen.

Until then, hold on to the Brazilian real, because it has the economic wind to its back.

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SeanHyman
It's the difference between up and down, right and wrong, night and day. Consider for a moment the Brazilian economy and the U.S. economy right now. Their economies and their currencies couldn't be more opposite from one another. For instance, Brazil has a trade surplus....
sean,hyman,real,wind
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2008-59-23
Wednesday, 23 Jul 2008 12:59 PM
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