By Win Thin
The Brazilian currency, the real, is getting hammered today and is one of the worst performers in the current risk-off environment.
The dollar/real currency pair (USD/BRL) is approaching the key 1.90 area, which is the high from January and again in May. Given the heightened level of concern regarding Europe/Greece, this level may not hold again.
A break of 1.90 would point to a test of the minimal retracement level for USD/BRL at 1.9850, which is the 38% level of the big drop in 2009 as risk appetite picked up.Although emerging-market fundamentals remain strong, we cannot foresee any sustainable emerging-market foreign exchange rally until the situation in Europe has been addressed. High interest rates are no protection, as the Brazilian real (with rates at 9.5%) is suffering more today than the Czech koruna (CZK) (0.75%) and Polish zloty (PLN) (3.5%). We do note, however, that Brazil interest rate futures have pared back tightening expectations as the European crisis deepens. The January contract has fallen to 10.97% from a peak of 11.23% in early May, and it may fall further. This has occurred despite upgraded growth forecasts and a continued creep higher in inflation (mid-May IPCA rose a larger-than-expected 0.63% month over month and boosted the year-over-year rate to 5.26%). Other emerging-market currencies have broken or are about to break some notable levels. The dollar/Mexican peso pair is back to more than 13, the dollar/rand pair (USD/ZAR) is flirting with 8.0 and the dollar/Chilean peso pair (USD/CLP) is back to more than 550. Equities are down significantly, commodities are falling and Treasuries are up. Thus, the classic risk-off trade is in play. Although the euro has held up after yesterday's short-covering rally, it should eventually play catch-up. After all, Europe is the epicenter of all the sovereign risks that are roiling the markets right now, so it cannot escape today's carnage for much longer.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV