On Wednesday last week, the central bank monetary policy committee (Copom) decided once again to cut the Brazil interest rate, continuing its easing cycle to counter softening demand from Europe and lower inflationary pressures.
If you thought metal prices — and iron ore in particular — were still all about China, you would be right. However, Brazilian monetary policy can make the difference between a profitable miner and one to avoid.
Asset class correlation is rarely an exact science, but traders have found that some indicators are still invaluable triggers for timing entries and exits on countries such as India and Brazil.
An overly strong local currency has been a structural problem for Brazil — except, of course, when the real has been too weak for the government’s comfort. It looks like the situation is getting ready to reverse again.
The Financial Times reported Tuesday that the FTSE index group has created an index of eleven currencies and two commodities for use by investors to hedge against currency and inflation risk. The “Wealth Preservation Unit” includes the world’s seven largest currencies and those of Brazil, Russia, India and China, as well as a 4.5 percent weighting in gold and oil.
In emerging markets we have a saying that if you can get the currency right, you are halfway home. Foreign exchange is the major determinant of whether your investment is good or not, so that is what we are talking about today on Trading the Globe.
The best performing stocks from last year gained only 2% in the first three weeks of 2012. The worst performers of 2011 climbed 11%. This has been true in the currency markets as well.
Brazil is wary of opening up its $350 billion in foreign exchange reserves for IMF aid until it receives a political commitment to reform that would give emerging market nations greater representation and influence over the fund’s decisions.