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Good Day Currency Traders!

If there’s one country that’s still sailing along despite all of this sub-prime mess, it’s Brazil.

While many countries are feeling the effects of the U.S. economic slowdown, Brazil couldn’t be flying higher…literally. Brazil’s currency, the real, just hit another high on Friday.

Check out the chart below. The real has appreciated a whopping 22% against the dollar in just 12 months. Wow!


Brazil Pounds the Dollar as it
Escapes the U.S. Woes!



So why is Brazil doing so well? Heck, many years ago the real was a “joke” in the currency markets.

After all, Brazil defaulted on its foreign debt TWICE in the past 25 years. Back in 1983 – less than 25 years ago – Brazil had a negative international reserves. At the time, the government told foreign creditors that it would only pay interest on the debt and not principal.

Then in 1987, the country decided to pay only principal and not interest. Then later on in 1999, Brazil’s central bankers devalued their currency and caused the real to tumble 30% in just 10 days. That was happening while the current account deficit climbed and unemployment was knocking out decade highs.

Now keep in mind that the Russian ruble had defaulted on its debt in 1998 and Asia was hit by a financial crisis also. So at the time, it didn’t take much for money to “get an incentive” to flow out of emerging markets

Brazil Enjoys a Surplus as Commodities
Boom Around the World

Fast forward to 2008 and see how far the Brazilians have come. For the first time, Brazil just became a “creditor” nation in January. So Brazil took in more than they owed. How did they manage that?

Well, for starters, the commodity boom has been good to Brazil. They’ve been exporting agricultural commodities like soybeans, iron-ore, beef, cars and oil. So as the world bought up Brazil’s goods, their international reserves swelled.


How to Position Yourself for the Next
Money Rush to the Real

In fact, Brazil's Finance Minister Guido Mantega said last Thursday that foreign reserves reached approximately US$188.5 billion in January. Meanwhile external debt was close to US$184 billion.
This “total makeover” is probably going to “up” Brazil’s credit rating possibly as soon as the 3rd or 4th quarter of this year.

When this happens, traders who were either scared to invest in Brazil or weren’t allowed to will now pour into the country, as Brazil’s rating goes up from the “next highest notch” to ”investment grade.”

Look what Standard and Poors recently said about them:

''That announcement no doubt puts Brazil closer to investment grade,'' Lisa Schineller, a credit analyst at Standard & Poor's, said in a Bloomberg Television interview from New York.

So now, just these positive comments are causing the Brazilian real to soar. However, it will soar more if and when it gets the bond rating service’s “top rating.”

Their finance minister believes that their “investment grade” credit rating could come as early as this year. I believe so too.


Time to Get in on the “Real Deal”
This could be a great time for you to hold Brazilian reals. Investment is pouring into the nation already and this should only grow even more as they climb in their rating status.

If so, you could hop in before this new wave of institutional money pours in. Brazil has the highest inflation adjusted interest rate among the emerging markets. So you could gain appreciation in the currency as well as great, regular interest while you hold it.

This is much better than the United States’ negative inflation adjusted rate. So holding reals or selling the USD/BRL currency pair could be a great move for you.

Brazil’s exports have tripled since 2003 and this probably won’t slow down any time soon. As long as the “commodity boom” is in vogue, Brazil will profit from it and so will its currency.

Sean Hyman, Currency Director


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Making 'Cents' of the Headlines

Why Bernanke May Have to Eat His Words –
And Eventually RAISE Rates Again



What Happened:

Well good ole Ben Bernanke mentioned a couple weeks back that he could raise rates just as quickly as he cut them if inflation managed to increase. Later this year, Bernanke may, in fact, have to do just that if inflation keeps rearing its ugly head.

The inflation at the producer/wholesale level just doubled to 1.0% vs. 0.4% expected. Wow! Now there’s an increase for you! Even the core PPI was higher. It came in at 0.4% vs. 0.3% expected.

The previous numbers also showed inflation was growing (at the producer level) yet the producers just “sucked it up” and didn’t pass along those costs to the consumer.

What I Say:

However, we know that doesn’t last for long. It all eventually runs down to the bottom of the food chain and the consumer (unfortunately) gets stuck with the increases in inflation.

So in the end, look for the CPI (inflation at the consumer level) to pick up as producers “pass” their costs onto us (the consumer). It’s really only a matter of time before this becomes reflective in the CPI numbers.

Once this happens, Bernanke will have to start taking back those rate cuts to fight inflation once again. He does this by taking money out of the financial system – as opposed to papering the economy with dollars – which has been his main trick so far.

However, in the near-term he’s more concerned about growth getting killed. So he’s willing to tolerate some inflation in the near-term to save the economy from slumping even more.

But later on this year, he may have to readdress the growing inflationary concerns and take those rate cuts back.

Now back to the PPI numbers….

These higher producer costs were mainly found in higher fuel, food and drug costs. We know those aren’t going away anytime soon.

U.S. gasoline prices just broke out to a recent all-time high when they should slump seasonally. So there’s strength in a market when there’s normally a weakness…it tells you that prices aren’t going down any time soon.

Besides, it’s only a couple of months from the traditional higher oil and gas season. That’s when energy is supposed to start “ratcheting up” because more drivers go on summer vacations. Gas prices normally push upward in April and May as gas stations get ready for the summer driving (vacationing) season.

We also know that food costs aren’t heading any lower because they’ve been going down for almost 35 years now. However, that “downtrend” just broke this year and prices are heading higher for the first time in a long time. Why? Because we’ve got less farmland and a growing population (not only in the U.S. but globally). So a shrinking food supply and an increasing demand warrant price hikes.

Then there are drug costs. I can’t remember a time in my entire life when drug prices went down. Heck, I saw Suze Orman’s show the other day on CNBC and she estimated that retiree’s will need to set aside US$500,000 just for healthcare related expenses alone. Yikes!

Even financial planners don’t see these costs going down through the years either.

So as the economy stabilizes in the upcoming months, expect the Fed to take back the rate cuts and focus on inflation once again.

When this happens, it will support the U.S. dollar in the short-term (as in this year). I’ve been expecting the buck to rally in the latter half of 2008 for a while now.

I just heard an audio interview with Jim Rogers on Monday. Now, he too, is expecting a dollar rally (this year only). He’s going to use that rally to get out of his remaining dollar holdings and into the Chinese yuan in particular. However, he also stated he’s buying the yen and the Swiss franc. How interesting! I tipped you off to those months ago too.