Brazil...A crisis brewing....

Local newspapers are talking more and more about the highly leveraged operations of the Brazilian Corporates. This is causing serious difficulties for the local economy and is weighing heavy on market liquidity and credit quality. Basically local corporates put on a series of trades that go poorly if the dollar strengthens against the Real. Market talk puts the amount at between 20-40 billion usd. Many corporates are being forced to close these transactions at large losses and most do not have the capital to pay these losses off. This is causing the dollar to move even higher. The biggest problem as with here in the United States is that the corporate credit worthiness is hard to quantify. As such are banks going to lend to these corporates to allow them to stay in buisness?

I think this all points to a weaker Real and lower rates in Brazil. I cannot see how they can raise rates in such an environment. I think the currency will take the hit here so my trading view is to buy Usd/Brl and to recieve rates in the two year sector.

I have a similar view in Mexico as corporates in this country put on similar trades and as such should have a similar effect on the economy...to slow it down. The Mexican Central Bank has already begun to intervene in the market selling dollars (unlike Brazil where they have not had to do that yet). The Mexican CB has sold around 9 billion of its 90 billion dollars reserves. I think this points to a much weaker Peso in the coming weeks and a steeper yield curve out to two years.

Also the dollar looks strong against the major currencies. Look for the Euro to break 1.3000 in the next week or so.

Good Luck and Good Currency Trading.