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Warning Signs Coming Out Of Brazil
BBM Gestao de Recursos issued a statement publicly warning about imminent weakness in BRL and a potential central bank reversal of recent record low rates. BBM's Beny Parnes, himself a former central banker, explains that BBM is mostly scaled out of its positions and believes that most of the wind has been taken out of BBM's big money makers from the first half of the year.
Indeed, BBM's portfolio has significantly benefitted from a 22% surge in BRL and lowered rates - a position we discussed back in March, though we overshot rates by a quarter point - but Parnes defends the paring back, citing "less opportunity" in the current environment. We agree with the sentiment despite the recent dollar beatdown since mid April. Most of the fundamental picture has been accounted for with the recent run-up but increased liquidity may provide a second wind. Emerging markets continue to be interesting, especially from a long-term view, and we'll continue to keep an eye out.
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I'm having a little trouble getting my head around this. Clearly the Real has strengthened in the face of interest rate cuts. I haven't yet done the digging but off the top of my head I can think of other recent examples following that pattern.
What I am sure of is the old paradigm where interest rate differentals were the driving factor behind currency moves. So what now is making the prospect of Brazil raising rates something that will lead to Real weakness? The article just seems to say the firm believes Real strength is overdone but does not articulate the thesis.
Rates drop from 13 to 9, big deal - you're still getting a 9% spread on ZIRPs. Real strength is also not solely driven by rate differentials. There are higher yielding currencies but they tend to have significantly worse outlooks than BRL. What's the alternative?
I totally dig that explanation re:the upward trajectory of BRL. 9% is still a fatty yield for a soverign from a country with the prospects of Brazil.
My theory is that the big driver in currencyland for the forseeable future will be the budgets of the respective governments. So a country talking about draconian cuts will likely see their currency appreciate. As relates to Brazil I found this nugget that talking about defecits reaching 8 year highs: http://www.bloomberg.com/apps/news?pid=20601086&sid=aZ39Sttp4jic
Either way, thank you for posting on the goings on in currencyland. I think currency moves are going to set bounds on what equity markets can do, so I'm always glad to have your insights.
Forget budget deficits, look at the CA.
One should remind that BBM is kinda famous in Brazil for being involved on a daily basis in a scheme of currency manipulation: there is a contract in the local futures exchange which trades forward points over the volume weighted average of the spot BRL/USD rate and is converted, by the end of the trading session, in a 1st future contract. What they do is buy our sell this forward points contract at the opening of the day, manipulate the spot market (which is shallow) to get a favorable rate and unwind the position along the day in the futures market. It seldom goes wrong...
Oh look at the market soaring on dreadful jobs numbers and Exxons fall in earnings.
Seems the more you lose and the worse the numbers the higher you pay for the shares.
People buying this must be in a dream land world
on cnnmoney they didn't like the number so they moved quickly to the weekly moving average because it was declining....just slightly.
Who cares if the wma is declining even slightly, we still have massive job losses and they're still happening.
I know I keep saying this, but IF I were still a trader, the ONLY thing I would be long would be the USD$.
OK, all beat on me now.
Fascinating -- gentlemen , place your bets...
I am brazilian and I can't see how the central bank could bring our rate lower, this country has a huge depressed demand and any incentive via interest rate could quickly spark inflation and credit delinquency as it occurred many, many times in the past.
The government showed its tax relief package which kicked in just a couple of weeks, what people don't know yet is if this package is sustainable (and I think it isn't cause no matter how strong our domestic market is, we still depend on commodity prices).
Last year BRL was brutally manipulated by non-financial companies which ended up at the brink of failure, the current upward movement could be some kind of manipulation too.
Brazillian here as well, though born in the states and lived here my whole life (double citizen). I was wondering, I heard some rumors that there may be a freeze on bank accounts (personal) worth 40k+ reals in the near future? If so, any ideas as to why?
The last time that happened in the early 90s (btw, I was 9 yrs old lol), I guess it delayed our investment grade rating by 5 years, so I don't think they would do such thing again for debt financing sake and as its purpose was to stop the hyperinflation, a problem we don't have right now.
Again about the BRL, you could see the central bank buying USD on a daily basis, so they don't think the real have much more to go. IMHO I also don't believe a real should be higher than half a dolar in the current slow recovery scenario.