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Lost A Mint On The BRL Carry Trade? Don't Fret - Goldman Is Here To Save The Day
As we highlighted previously, any investors who had gone long the Brazilian Real (BRL) in January, funding this position with either USD or JPY shorts, had their face ripped off after a loss of anywhere between 7 and 9% in one month (don't annualize that). But instead of covering, here is Goldman with advice on why Einstein's definition of idiocy is for chums. The firm has just come out with a trading call (remember all that huddle stuff?) telling investors to go short $/BRL "on better macro data and hawkish BACEN February 1, 2010." Who knows, maybe mean reversion will work this month. Goldman's target: 1.75 and a stop above 1.94.
During the recent sell-off in cyclical assets, the BRL was among the hardest hit currencies globally. Last week alone, the trade weighted Real lost 3%. However, given the solid US data at the end of last week and global PMIs this morning, growth expectations priced into cyclical assets are now probably too pessimistic.
In early January, the BRL was trading at levels very expensive relative to fair value (GSDEER). As we have argued, cyclical factors justify a reasonable degree of overvaluation, but at $/BRL 1.70-172, the risk-reward for long BRL was poor. Since then, local markets have moved to price reduced growth views on Brazil. This was also visible in disappointing capital inflows into Brazil in January and the marked weakness in the BRL. BRL is trading 10% weaker than at the start of the year. Moreover, during the recent turmoil, Jan 12 CDI futures have declined by 18bps from the recent highs.
However, Brazil's growth has remained strong and is accelerating. BACEN has moved from a neutral bias towards a more data dependent stance, which in our view makes a tightening in April very likely. Together with cylical assets moving back to a more constructive view of the world, a more hawkish central bank stance could support a return of the BRL towards the lower end of the recent trading ranges. A pick-up in IPO flows could further boost the BRL.
We recommend short positions in $/BRL at 1.8870 with a target of 1.75 and a stop above 1.94
Goldman will be more than happy to take the other side on that trade: and, no it won't be made for a prop account: it will all be flow. We promise.
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"Goldman will be more than happy to take the other side on that trade: and, no it won't be made for a prop account: it will all be flow. We promise."
I've been watching Goldman's "public" trading/investment opinions for 2 years now and while nothing can be proven (after all, it's just an "opinion" right?) it appears that Goldman is saying things to set up the suckers. They seem to be consistently right with their own trading and consistently wrong (or early, which is the same thing as wrong when you're getting scalped) with their "public" calls.
Coincidence? I think not. But what the hell, that's just my "opinion" right?
<sarcasm>
Are you saying that Goldman Sachs is purposefully sheering the sheeple by doing things like selling AAA-rated junk to clients while betting this junk will drop in value?
NO WAY!
</sarcasm>
Going to Brazil at the end of the year, planning to find a house/apartment to buy in my wife's family's region in northeast Brazil. Was waiting for a downswing, going to have brother in law exchange a good amount of USD savings, and if we dont find the right place, I will probably net 10% :)
It's not wise to take short positions in any EM currency when there's known global risk lurking around. Right now there's Greece (currency risk) and Iran (oil risk) and any flare up will send EM currencies sky high, as always.
Brazilian stocks are ripe for profit taking at the same time that PBR can't fund new pre-salt oil investments at any decent rate. "Disappointing capital inflows" should tell you this: smart money is looking for the exits, quietly for now.
Tightening in April is obvious as 8.75% is not sustainable for Brazil with such a historic of inflationary pressures. 1.72 is unsustainable too as it's breaking exporters (except for Vale which is always hedged on the right side of the trade). Exporters want 5%, government wants no inflation (this year we have presidential elections) and bankers want high interest rates. Guess who wins...
Goldman has been hyping USDJPY longs since it was at 96 eight months ago.