Brazilian Real Up 5.5% in 2012
Indeed, Minister Mantega started once again to talk about measures to stem BRL's appreciation. It is understood that the government has a preference for USD/BRL around the 1.80 level. We see no reason to doubt their resolve to act again and would advise investors to be cautious as we approach the 1.75 level. Late last year, Mantega promised that USD/BRL would not return to 1.60 and so actions will likely intensify as BRL strengthens further.Around these levels, the risk-reward starts to flip for us and we see a greater chance that BRL will start to underperform other EM currencies. However, implied yields on BRL NDFs remain attractive despite the 200 basis points of total easing seen so far, hovering near the 9.0% level for the 1-month NDF. As we saw back in 2011, a relatively stable BRL coupled with high carry is enough to maintain investor interest in the real, even if outright appreciation is less likely.
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