Political Risk Latin America Blog @PolRiskLatam

The end of the BRL carry?

Posted in News and Articles, Political Risk by politicalrisklatam on March 29, 2011

by Jonathan Wheatley for Financial Times – Beyond Brics, March 29th, 2011.

Is the carry trade running out of legs? Few investors seem to think so. If anything the Brazilian real, the great carry trade currency of choice, is still on a strengthening course – so much so that Brazil introduced fresh restrictions on foreign inflows on Tuesday, extending a 6 per cent financial transactions tax to short term loans and securities.

But there are two sides to every trade. And as the first signs begin to emerge of an end to quantitative easing and a start to tighter monetary policy in the developed world, investors should be aware that one day, maybe soon, spreads will tighten. And when that happens, the next step is for the carry trade to unravel.

For years it has been hard to ignore the appeal of the Brazilian real. Even the global crisis hardly blew it off course. The trade-weighted and inflation-adjusted BRL is currently about 25 per cent above its five-year average and continues to strengthen. (continue reading… )

 

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