The Hottest Spot South of Havana
By Ed Ponsi, President of FXEducator.com
Greetings from Rio de Janeiro! It's summertime here, hot and humid and rainy. While we wait for the weather to clear (in anticipation of a trip to the beach), let's take a look at the beleaguered local currency, the Brazilian Real (symbol BRL).
The Brazilian Real is a commodity currency, meaning that it tends to do well when commodities prices rise, and performs poorly when they fall. Since commodites prices have collapsed in recent months, the Real has been punished accordingly, losing 22 percent vs. the U.S. Dollar since Sept. 26. The currency has weakened by more than 30 percent since August, when it reached a nine-year high against the dollar.
Crude oil is the #3 export of Brazil, and the sharp decline in energy prices has weighed heavily on the currency. Brazil is also a big producer of copper, which has been hammered lately. Coffee is also a big product, along with commodities such as soybeans, iron ore and sugar. When commodity prices recover, the Real should recover as well.
The recent decline of the Real is in sharp contrast to its overall performance. In fact, it has been the best-performing emerging-market currency over the past four years. Much was made of the fact that Brazilian supermodel Gisele Bundchen prefers payment in Real over U.S. Dollars, a strategy that would have rewarded her richly up until the currency's recent nosedive. In case you were wondering, supermodels are not officially listed as an export of Brazil.
Brazil's benchmark interest rate is a whopping 13.75 percent. This is in response to high inflation; the country posted 12-month consumer price inflation of 6.4 percent through the end of November. This is well above the Central Bank target of 4.5 percent.
Brazilian interest rates are set by the Banco Central do Brasil, which is popularly referred to as the Central Bank. The Central Bank takes a hands-on approach to the currency markets, and intervenes frequently to drive exchange rates to desired levels. Although in recent years this has meant purposefully weakening the Real vs. the U.S. Dollar, the Central Bank has acted to strengthen the currency within the past month. When the Central Bank wants a stronger Real, they puchase their own currency and sell U.S. Dollars in the open market. When they want to weaken the Real, they simply do the opposite.
The Central Bank projects that growth will slow to 3.2 percent in 2009 from 5.6 percent growth projected for this year. This is in sharp contrast to most of the world's major economies, which are currently experiencing negative growth.
While the high rate of interest may be a temptation to go long the Real, let the buyer beware. Goldman Sachs economists predict the Central Bank will cut Brazil's benchmark interest rate in January and ease rates six times in 2009, lowering the benchmark rate by a total of 150 basis points. While these actions, if taken, would bring the rate down to 12.25 percent, Goldman had previously estimated a rate increase of 150 basis points in the year. One could say that Goldman's expectations have taken a 300 basis point swing, from 15.25 percent down to 12.25 percent. While the Central Bank left rates unchanged at its December 10 meeting, it did discuss the possibility of a rate cut. This event changed more than a few minds about the future of Brazil's interest rates.
Final thought on the beaches here; newbies tend to believe that Copacabana or Ipanema are the best beaches in Rio because their names have been immortalized in popular songs. This is not the case. According to the locals, the best beaches in Rio are the ones you've never heard of. Besides, the hit song by Barry Manilow isn't actually about Copacabana Beach, but about a club named after the beach. Otherwise, it would be the hottest spot South of Havana.
Year-End Thoughts
There are certain things that every trader should do at the end of the year. I recommend highly that you perform this quick excercise. Take a look at your trading record for 2008, and calculate how much net interest you received (or paid) for the year. This is interest collected or paid due to positions, not simply interest you may have received on money that was idling in your account. What I have found is that traders who pay little heed to swaps (the amount of interest charged or collected on a given Forex trade) tend to pay a good deal more than they realized, because the numbers really add up over the course of a year. By the same token, traders who are cognizant of these issues tend to collect interest. In fact, the amount of interest collected can sometimes make the difference between a profitable trader and an unprofitable trader.
This is not to say that we should only take trades that result in positive interest, also called positive carry. Such a strategy would have proved disastrous in 2008, as interest rates on many high-yielding currencies were slashed repeatedly, causing them to plunge. But the amount of interest that is charged or collected per trade is a knowable quantity, and should be factored into the profit and loss equation.
Thank You!
I just want to say thanks to all of the loyal readers out there. 2008 has been another great year, and I hope that 2009 brings happiness to all of you. Who would have ever guessed that 2008 would bring a huge rally in the Japanese Yen, and the collapse of so many currencies? What will happen in 2009? Will the "carry trade" spring back to life after being devastated in 2008? Will the massive USD rally come to its conclusion? Will we get beyond this credit mess, or will it linger for years? These are the questions that are on traders' minds, along with many others. In addition to the wonderful rewards that the trading business can bring, it is the uncertainty and the unknowable future that keeps us coming back for more. It's a beautiful feeling to wake up every morning and ask yourself, "What is going to happen today? " Best of luck in 2009!
