Forex Investment and Currency Trading

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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1 – 3 Month Outlook: Global storm roils BRL
The financial crisis has deepened and the bearish forecast for emerging markets, including Brazil, has materialized, although it occurred faster than expected. Over the coming months,  it’s expected that the current environment of high volatility and elevated risk aversion to persist, driving aggressive sell-offs followed by occasional large rallies. The moves in USD/BRL over the coming 1-3 months will be driven not by fundamentals but by commodity price adjustments, global risk aversion swings and
broad USD trends. Forecast for USD/BRL for end 08Q4 is now 2.00.
BRL 6 - 12 Month Outlook
An expected continuation in global de-leveraging and risk [...]

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The monetary policy committee (COPOM) hiked the overnight Selic target rate by 250bps since first lifting rates in this cycle on April 16. In the last meeting, the decision was split (5-3) with dissenters arguing for a lower 50bp hike than the 75bp move that was actually made.
Recent Copom minutes are in line with expectations that signs of inflation are beginning to ease and provide the BCB with some comfort. Fewer inflation strains are evident from recent price movements as well as the potential for falling commodity prices reduce pressures going forward. Copom clearly remained concerned at the meeting regarding [...]

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