Risk-taking in currency markets is too early

A recently released report from Goldman is making the rounds and is amping up the buying temperature for a perennial institutional favorite, the carry trade. Even Bloomberg has picked up the story and is running with the theme. They specifically call out two ZH favorites, the BRL and the AUD - however we think this move is really too early/too late, depending on how you look at it. 

As seen below, the BRL would have been a great buy right after our last post on it. However, we now expect a major turn around after the current market situation "resolves" itself and investors return to their bunkers. As we have posted extensively on the reasons why we see the market correcting in the near term, we won't rehash the details but suffice to say that you don't want to be caught short on the unwind. If not a direct directional bet, going long vol on the BRL in particular and EM baskets in general seems the smartest play in currency right now. Additionally, look for unrelated casualties (GBP) as the US equity correlation across some of the majors brings down some of the recent gainers.

Disclosure: short GBP/EUR, short GBP/USD, square AUD/JPY

Comments

[pmckim (not verified)]

Cornelius,
I'm not sure I understood the last part, "If not a direct directional bet, going long on the BRL in particular ... seems the smartest play in currency right now.

I live in Rio part of the time and in NV, CA the rest of the time. So far Brazil is holding up well. I have significant funds down here right now. I'd agree on the carry trade, but I would also agree that the next leg down in the markets should hammer Brazil's commodities. If oil can't stay above $50 then BRL's offshore oil is a bad investment -- probably not good until 2010 - 2011. It's iron ore even worse. Ag I would suspect does well particularly livestock with no feed costs.

So you are saying good short term play, but becareful then things fall apart on the next leg down?

Brazil is interesting in an election cycle as BRL incumbents spend tons -- not as much as US is spending. Meanwhile Lula fired the Pres of Banco do Brasil to reduce the spread on its loans. Very little debt down here, and Brazil can drop rates to reduce its interest costs, and would like to keep the Real at R$2.50:1.

so I agree BRL is well positioned, but when the crowd leaves and commodities fall again to Depression levels, there will be a question as to surpluses/deficits, both gov't and trade.

Pat

[Cornelius (not verified)]

I think you misread- go long vol on BRL/EM basket, not long BRL/EM basket. Does that clarify?

[In Debt We Trust (not verified)]

The yen-dollar looks oversold on a 1 year daily chart.

MACD, stochs, and rsi are pointing to potentially oversold conditions.