In a recent blog post, we noted the marked rise in the trading volumes of foreign exchange markets around the world. While the purpose of this piece was to highlight the rise in prominence of economies outside the United States and Europe, we did not fully address how investors could benefit from exposure to foreign currencies. In this piece, we focus on the reasons why we believe the Brazilian real may appreciate against the U.S. dollar in the coming months.
After a period of significant underperformance across all emerging market assets (equities, bonds, currencies), we believe the recent nomination of Janet Yellen as the next Federal Reserve Chair may result in a “lower for longer” path for U.S. interest rates. As a result, we believe this may have the effect of increasing asset flows into the emerging markets (EM).
While investors have traditionally invested in either stocks or bonds to express a bullish view on an emerging economy, the one asset class that is expected to benefit from these flows regardless of the asset mix are those countries’ currencies. In this blog, we seek to highlight the positive catalysts we believe can lead to an appreciation in the Brazilian real through the end of 2013.