The Climbing Brazilian Real

As we have said last week, the Brazilian real is heading on a one-way street up against the U.S. dollar; we see this as a lasting trend and not as a short-term correction. As we also said here, the Brazilian Central Bank policy of accumulating reserves is a very good one, but it will not prevent the appreciation of the Brazilian real.

In the next few days, the Brazilian currency will test the psychological level of BRL/USD 2.00, and we expect it go through it without major problems. Yesterday the Brazilian BRL/USD reached 2.02 and it did not go further because the Brazilian Central Bank did all it could to prevent a major appreciation.

Just yesterday, the Brazilian Central Bank acquired US$1.185 billion. The Brazilian Government and export companies would like to prevent an appreciation of the real past BRL/US$ 2.00. It seems a more difficult task every new day.

As we said last week, there is just one solution for the currency appreciation problem in Brazil: lower interest rates. After three aggressive cuts this year, current rates are at 10.25% per year -- still too high.

We were expecting rates to reach 9% by the end of 2009. Now we are convinced that this is not realistic. Interest rates should be below 9% -- our new guess is 8.5% by the year end. Nevertheless, the Brazilian real will continue to appreciate in the very short-term.

In such an economic environment, we continue to recommend companies focused on domestic demand, particularly the ones that would benefit from the currency appreciation. We like TAM (TAM), AmBev (ABV), Net Servicos (NETC), Vivo (VIV) and Sabesp (SBS).

Comments

[Danny Furman:]

dislike CPL, or simply prefer the aforementioned? I own shares of CPL and SBS.

Thank you for the insight.

May 22 11:08 AM

[Gravity404:]

Thanks for the info.

Does anyone have any thoughts on BRF the new Brazilian Small cap ETF?

May 22 12:02 PM

[manya05:]

I looked at BRF but the management fees are very steep for something that seems to be tracking an index. I guess is the premium for being the only offering? I do not know, still studying BRF. My second thought (since you ask) is that this will behave like a yo-yo, it will move like a rocket when it goes up, but it will fall like a rock in the next big Dow correction. Be careful.

May 26 08:28 AM

[Gravity404:]

Totally agree with your points. I usually stay away from ETFs with exception to play in markets that are hard for an average investor to play in.

Im long in oils and basic materials. PBR and VALE, which I already own, is over 30% of EWZ. So, I thought this was a good play on the emerging middle class in Brazil based on the fact that these huge companies and the country's natural resources are going to help drive the new middle class.

The forthcoming drop in the USD should also help drive this ETF. We do need to be aware of potential hyper inflation in Brazil which has been quite common over the decades.


On May 26 08:28 AM manya05 wrote:

> I looked at BRF but the management fees are very steep for something
> that seems to be tracking an index. I guess is the premium for being
> the only offering? I do not know, still studying BRF. My second thought
> (since you ask) is that this will behave like a yo-yo, it will move
> like a rocket when it goes up, but it will fall like a rock in the
> next big Dow correction. Be careful.

May 26 10:51 AM