Brazil’s Real to Benefit from the New Carry Trade?

We had more probing higher in the non-dollar currencies only to see the gains wipe away at the end of the day, yesterday. Still, as I told a radio audience in Oregon yesterday, traders, investors, etc. still believe the euro (EUR) is worth more than the dollar by quite a bit… Gold also gave back some gains overnight…

Speaking of the euro… The European Central Bank (ECB) has already shrunk their balance sheet by 9.5%. Talk about being more credible than the Fed… The Fed, on the other hand, is increasing their balance sheet, and Freddie and Fannie now have “unlimited” coffers in which to reach for more bailout funds. So if they need bailing out, their balance sheet is awful, which means that the Fed will be buying those toxic assets to get them off the books of Fannie and Freddie…

I’m telling you now, so you can hear me later… The Federal Reserve is evil. Talk about the axis of evil… That axis is right here in the Fed Reserve!

OK… I’m going to stop there. I have other things to talk about… Oh, why don’t we talk a little about deficit spending here in the US? That’s always a “happy” topic, NOT!

Government deficits have caused the US savings rate to turn negative for the first time since the Great Depression, and the gap is widening even as households and companies put away more money than ever before.

Deficit spending by the government reduced net savings at an annual rate of $1.33 trillion in the third quarter of last year. State and local government deficits widened the gap by another $14.9 billion. At the same time, personal and corporate savings increased by a record $983 billion… All according to Bloomberg

So… You see, folks… I told you… While it is prudent for us to save and not spend what we don’t have… Unless the government goes along and does the same, the damage to the country’s finances will continue.

Hmmm… Sounds like a good place to hop off that subject, and take a look at what’s going on around the world.

Well, what have we here? Looks like somebody let the cat out of the bag in Brazil… Just when traders were getting the bejeebers scared out of them with the Sovereign Wealth Fund buying dollars and selling reals (BRL), they see this news…

Standard Chartered Plc. Just printed a report calling for interest rate hikes in Brazil to 11.5% THIS YEAR! In a recent Bloomberg survey, the median estimate for Brazilian rates this year was 10.5%… So… Even if we only see the median estimate, and not the 11.5% Standard Chartered Plc. is forecasting, Brazil will still enjoy a HUGE rate differential to the rest of the world… But most importantly, the dollar.

In fact, Standard Chartered Plc. also said that they believe the real will benefit from carry trades… The dollar will be sold at its über-low rate, and the real will be bought with its über-high rate…

If that’s the case, then the Brazilian Sovereign Wealth Fund, has their work cut out for them in their attempts to keep the real from getting stronger versus the dollar!

But get this! Brazilian traders, who weren’t a part of the Bloomberg survey, think Brazilian rates will go to 12.7% this year! WOW! So, in any case, the interest rates in Brazil will be going higher in 2010… Of course, didn’t I tell you that, months ago?

This is important stuff, folks… I mean look at how the Aussie dollar (AUD) has recovered in three 25 BPS rate hikes… Imagine the rate hikes that need to take place in order to take Brazilian internal rates from 8.75% to 10.5% or 11.5% or even the 12.7%.

PIMCO, the largest bond fund in the world, announced earlier this week that they were reducing their exposure to US debt… Yesterday, Bill Gross of PIMCO, was on the TV here, talking about US Treasuries, and how he would rather buy a German bund (treasury) than a US Treasury, for the Fed is still implementing quantitative easing, whereas the ECB has begun to shrink their balance sheet… Two completely different directions for these two central banks.

I’m telling you this now, so you can listen to me later… Treasury yields are going to rise in 2010, causing huge losses for holders of existing Treasuries… Are you still holding them?

The Fed’s last FOMC meeting minutes were printed yesterday afternoon… Seems there was some debate on the subject of asset purchases… Some wanted to boost or extend security purchases, while one Fed Head sought a reduction of the asset purchases. And apparently we have some Pfennig readers among the Fed Heads, as a few of them expressed their concern that the Fed’s “extraordinary stimulus” is presenting “risks”… (That’s central bank parlance for “inflation”!)

So… In all, we had nothing but discussions in trying a balancing act.

Handcuffs… That’s what houses are to people looking for jobs. Used to be, if you could find a job in another city or state, you just moved, and took the job… But now… With homes so far under water from the original mortgage closing prices, there’s no way a “pick up and move” scenario can exist… So, this is another problem that the housing meltdown has caused… Handcuffs.

Well… The Japanese Finance Minister put knife in the back of the yen (JPY) last night with comments like, “it would be nice if yen weakened more” and that he “must work with the Bank of Japan to bring yen to appropriate levels” and that “many Japanese firms favor yen around 95”. That was like a HUGE SIGN TO TRADERS TO SELL YEN! Now, I don’t know if the Finance Minister will carry out this threat to direct the Bank of Japan to intervene and sell yen, but the threat alone is enough to scare the bejeebers out of yen buyers!

In Australia, overnight, retail sales for November (isn’t it awful that these things are so far behind?) simply blew the forecasts out of the water! November retail sales printed at +1.4% (the forecast was for a 0.3% increase!)

This is another piece of data that goes on the “pro” side of the ledger that we’re using to track data that could lead the Reserve Bank of Australia (RBA) to hike rates once again next month. So far, we’ve got an increase in home sales, and retail sales… With nothing on the “con” side…

One would have thought that this phenomenal retail sales figure from Australia would light a fire under the Aussie dollar to get it higher versus the US dollar… And it did – at first – with the Aussie dollar driving as high as 0.9268… But profit taking has pulled the rug out from under the Aussie dollar in the European session, bringing it back to 0.9175.

Jeff Rubin, who accurately predicted oil’s surge during the last decade, expects crude to reach $90 a barrel this quarter, and $100 by year’s end, according to Bloomberg, this morning…

Hmmm… I just did a video on Tuesday about oil, and made the case for a much higher oil price… Again… Ahead of the crowd…

It will be a pain for us here in the US to have oil at $100 again, but it will be all seashells and balloons for the Canadian dollar/loonie (CAD)… So, there you go… You can use the loonie as a hedge!

Then there was this… OK… Remember last year when I tried to make a case on CNBC about the Plunge Protection Team (PPT) and I was ambushed? Mocked? Made fun of? Well… Yesterday, I saw a story on MarketWatch about a trader who believes that the PPT is responsible for the stock market’s rise in 2009… Let’s listen in on a snippet of the story…

“The source of approximately $600 billion net new cash necessary to lift the market’s overall capitalization by $6 trillion last year could not be identified by TrimTabs, Charles Biderman founder and chief executive of Trim Tabs, said. The money, he said, didn’t come from traditional players such as companies, retail investors, foreign investors, hedge funds or pension funds.

“We know that the US government has spent hundreds of billions of dollars to support the auto industry, the housing market, and the banks and brokers. Why not support the stock market as well?”

There was another guy saying the same thing, yesterday, but I can’t find that story right now, so I’ll go on… And say once again… I saw this stuff last year, but was mocked, told to make a movie out of my claim of a PPT supporting stocks… I wonder what will come out of this?

To recap… The non-dollar currencies and gold saw their gains yesterday reduced in the overnight session. I think it had more to do with the whipping the yen got from the Japanese Finance Ministe.. Nobody likes to see a major currency like yen get sold by its central bank… And the other non-dollar currencies will struggle if that goes on. And finally, there was a lot of talk about the real being on the buying side of a new carry trade, as interest rates go higher in Brazil this year.

About Chuck Butler 105 Articles

Affiliation: EverBank

Chuck Butler is President of EverBank® World Markets and the author of the popular Daily Pfennig newsletter.

With a career in investment services and currencies extending over 35 years, Mr. Butler oversees all aspects of customer service and the trading desk for EverBank World Markets. A respected analyst of the currency market, Mr. Butler has frequently made appearances or been quoted by the national media. These include the Wall Street Journal, US News, World Report, MarketWatch, USAToday, CNNfn, Bloomberg TV, CNBC, and the Chicago Tribune.

Mr. Butler was previously the Chief International Bond Trader and Director of Risk Management for Mark Twain Bank, and has held significant positions in the investment industry since 1973.

Visit: EverBank

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