Brazil’s Currency, ETF Could Benefit From New Ties With Japan

August 28, 2008 at 6:00 am by Tom Lydon

When it comes to foreign investing, don’t forget about currency exchange traded funds (ETFs).

WisdomTree Dreyfus Brazilian Real (BZF) presents a great way to get exposure to global currency and diversification all in one ETF. A little exposure to such funds could benefit investors if the dollar trends lower again.

Roger Nusbaum for TheStreet says has a diversification benefit. Another catalyst for gains in BZF could be delivered through Banco Bradesco’s agreement with Mitsubishi UFJ Financial Group to sell funds that invest in Brazilian assets to Japanese retail investors.

In addition to Japanese investment demand, the real offers other positive qualities, too. Brazil has been benefiting from the commodities bull run this year. While BZF investors won’t be early in the game, Japan could be a new source of demand, in addition to continuing commodities strength. BZF fell 5.5% in the commodities correction of recent weeks, however.

Volatility in the fund is expected, but the target of the fund is the local money market rate, which is currently at 12%. Nusbaum points out that there’s no assurance the rate paid will be 12%, though: WisdomTree collects the interest and pays out once each December.

Brazilian inflation rate forecasts for 2008 and 2009 fell for a fourth week in a row, in a recent survey of economists. The Central Bank targets inflation at 4.5%, plus or minus 2%, reports Katia Cortes for Bloomberg.

Today, the country announced a drop in wholesale prices, boosting both retailers and banks, report Alexander Ragir and Paulo Winterstein for Bloomberg. Citigroup strategists say the economy is growing and inflation expectations have peaked.

Is it so? Could be, but we recommend you wait until Brazil moves back above its trend line to be sure instead of trying to make predictions.

iShares MSCI Brazil Index (EWZ) will be in a good position if inflation calms down, and the recent blend of yen to real creates a cash surplus for the economy.

EWZ is down 8.7% year-to-date, while BZF is up 4.7% since its May 23 inception.