Thursday, November 12, 2009

Brazilian Real, Potential Devaluation Speculation Grows, Follow-Up

Cover of The Economist this week

This is a follow-up on our warning from November 10.

Brazil’s Real fell for a third day as the transfer of a top central bank economist to the Finance Ministry spurred speculation that the two institutions are developing a joint plan to stem the currency’s surge this year. Emilio Garofalo Filho, was transferred from the Central Bank into a position working closely with Finance Minister Guido Mantega, as an adviser.

The speculation is that the central bank and ministry are looking to coordinate foreign-exchange markets to supress the appreciation of the Real, after the 2% IOF imposed in October appears to have failed.

Brazil will experience an "astronomical exchange rate pressure" in 1 to 2 years and therefore additional measures are necessary to reduce the speculative capital throughout the country, according to an alert by the superintendent of the research and monitoring of Banco Nacional de Desenvolvimento Econômico e Social (BNDES), Ernani Torres. He believes that one of the most serious problems that face the Brazilian economy going forward is the fact that the country is now "one of the key trenches of international speculative bubble."

As of 1:30PM. EWZ, the Brazilian ETF is down 2.85%, while BZF, the currency ETF is down 1.13%.

We also posted the straddles on both on the same post, reproduced below. EWZ is down 5% since then and BZF is down 2%. Enjoy!

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