Forex Investment and Currency Trading

Spot 2.4930 represents the 38.2% retracement of the Oct 2002 to Aug 2008 bear market range of 4.0 to 1.5600. Levels have been bumping up against this resistance at 2.49-2.50 since early October 2008. If 2.50 does not hold, next target will be 2.78 to 2.80, the 50% retrace of the full range and support during the April 2003-April 2004 consolidation. The sharpness of the move yesterday suggests some scope for overshooting. So we could see some near-term consolidation. That said the data out of Brazil this week was particularly negative with - soft November PMI and bank lending/credit data [...]

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FX outlook: Recognizing that the strength of BRL in the face of current account balance deterioration was sustained by capital flows, the reduction in the pace of accumulation of FX reserves by the Brazilian central bank (BCB) was an indication of an impending change in the overall balance of payments situation and direction in USD/BRL. FDI remains strong, but contrary to common perception, it has not been the major source of inflows in the last couple of years. Foreign flows have been dominated by equity and debt flows. In this context, the significant reduction in portfolio inflows in the last [...]

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1 – 3 Month Outlook: BRL at mercy of credit crunch

The merger of ITAU and UNIBANCO over the weekend may drive another bout of USD/BRL buying, offsetting the positive news of Brazil’s inclusion into the Fed’s swap line arrangement
and the new-IMF preferential access financing (the Short-Term Liquidity Facility, SLF) last week. With the possibility of other smaller banks suffering due to the liquidity squeeze, the odds of a BCB rate hike have completely evaporated. Going forward, the BCB will likely prioritize providing liquidity to local corporates and financial markets. The combination of US$200bn of FX reserves, and access to the [...]

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The widening of basis in Brazil and Mexico in October to 6-month highs was a testament to the dollar
pinch, The lack of USD in spot came from a bad mix of a pullback in cross boarder lending by foreign banks, large stock of external private sector debt, significant FX derivatives exposure in the corporate sector, and outright hoarding of dollars. Aggressive intervention by their respective central banks offset some of the pressure. The additional USD30bn in Fed swap lines will reinforce this cushion provided by official intervention even if in Brazil’s case, the swap lines are used to neutralize the [...]

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