Brazilian Reversal

I first went to Brazil in 2003. The exchange rate was slightly less favourable than it is today but still excellent. And everything was so cheap! I really didn’t have to look at price tags. I remember buying a beer, and a beer worked out around 19p a bottle. The barman asked me how many, and I thought “I could actually buy 200 and it would be less than £40!” I didn’t, but it was a great feeling. I eventually moved there and have visited many times since, and I’ve certainly noticed things getting more and more expensive over time. They have got inflation there which is currently at a 12 year high, but it’s been present throughout.

Looking at the FX pair GBP/BRL over the period we can see that we are at an important level. We’re seeing a classic reversal signal. That September candle is complete and it’s a hammer. Granted it would be better if it had closed lower than it opened, but still it’s less than halfway up the range. It looks like an exhaustion rally, and there’s not much support on the way down until we get to the 3.6-4.0 range. Nice looking stochastic as well, crossing over downwards.

Brazil has the Olympics or World Cup or something sporty next year, so that should help the economy and the currency. They are also an outlier on the bell curve of developed nations in terms of interest rates, sitting well in double figures at 14.25% chasing a fairly hopeless inflation target of 4.5% while inflation rages at 9.6%.

A problem in Brazil is the huge black economy coupled with almost institutional corruption. It makes it very hard to see where problems stem from, or how they are changing over time. The official figures are therefore incomplete at best.

The flipside of the currency exchange is the Bovespa, Brazil’s stock exchange, and as you might imagine, prices of Brazilian stocks are low. Some Brazilian companies are listed in NY, but nothing much on the LSE, so our way in is an ETF. I’ve looked at the db x-trackers MSCI Brazil TRN Idx [XMBR]. It’s found support, at least for now, at the low of ’09. It too has a hammer candle, and could be poised for a reversal.

With the ETF we’re really getting two bites of the cherry. On the one hand the Brazilian stock market could pick up – all the things that support it, like commodity prices, are also at low levels and have a propensity, one would imagine, to rise rather than fall at this point. But we don’t need the stock market to rise that much as we’re exposed to the currency risk in this particular ETF, so if the currency appreciates –which could happen more quickly than a recovery in the Bovespa – we’re quids in.

In both cases, it’s a reversal play so you’ll need to be confident that there is a reversal or it won’t work of course. The ETF is definitely one for the watch list if you don’t want to get involved in the currency pair itself.

Time to get on a plane and visit my favourite country methinks. It’ll soon be spring and I know just the place to have a beer and watch the sun go down, and that’s not easy to find in a country that has only an Eastern facing coastline. For some reason the locals do tend to give the setting sun a round of applause, which I found rather peculiar. Anyway, it’s always a joy to go to a place where the streets are clean so you don’t have to go searching through the undergrowth to find things downstairs, if you know what I mean.