Tuesday, November 10, 2009

Warning on the Brazilian Currency (Real)

Analysists in Brazil are warning that the government seems obsssed with the appreciation of the Real, and wants to stop it. There are talks of the target being a 20% devaluation.

The government's secretary of economic policy went public stating that the "equilibrium exchange rate" in Brazil is between R$ 2.10 and R $ 2.12 per 1 USD. The number comes from a simple math that calculates the average real exchange rate in 15 years, called the "equilibrium value", and from there you arrive at the nominal exchange rate today.

The point is that one of the leading economists of the Treasury thinks and states publicly that the country needs to promote an exchange rate depreciation of about 20%. After the uproar of the 2% IOF it is not news to anyone that the government is willing to do something about the appreciation of the real. Gradually, it becomes clear that there is an obsession with respect to the behavior of the exchange rate. How far will the government and the consequences of their actions? In recent days, a set of intentions of measures was announced. The medium-term impact on new measures on the price of the domestic currency is dubious. The appreciation of the Real has deeper roots and are based on the nature of macroeconomic equilibrium, which is unlikely to be reversed anytime soon.

If the government decides to keep inflation within the target and does not want to abandon the exchange rate fluctuation policy, which has tremendously helped to reduce the volatility of the Brazilian economy in the last decade, the trend of the Real in the currency markets is still up . However, with each new "IOF" idea the market can get stressed.

Here are current EWZ and BZF straddles. Straddles are are great for surprises.




This is not advice. Options are extremely dangerous and may cause 100% loss. Please do your own due dilligence.

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