Brazilian Real is a Great Bet

It’s become a common refrain among traders that emerging markets are the place to be if you want to make real money. Investments in developed economies carry less risk, but in emerging markets, you have the possibility of higher returns. The same is true with currency trading. The forex markets in developed countries are more developed, more liquid, more safe. The currencies of developing countries are more volatile but, if good, also more profitable. And at the forefront of profitable emerging market currencies is the Brazilian real.

The real is up 61.8% against the dollar over the last three years. Over the past six months alone, the real has gained 13.8% against the dollar, the best-performing of all the sixteen most actively traded currencies. As of 9:45 this morning, the currency was valued at 1.8762 per dollar. The reason why forex traders are so in love with the Brazilian real is pretty simple. High interest rates and robust economic growth, the key to any strong currency, are on full display in South America’s largest economy.

Brazil’s high yields should continue to serve as an attracting force for foreign investment. As such, look for the real to appreciate even further in the second half of this year. Brazil has an out-of-this-world 12% interest rate, and even after accounting for relatively high inflation, its real interest rate is 8%.

There are some forex analysts that are preaching caution with regard to the Brazilian currency. There is a sense that the surging demand will produce inflation that outpaces interest rate growth. And that would certainly cut demand for the real and drop it back down to earth.

But I think Brazil is still a great bet. The economy is looking great, with exports of iron ore, soybeans and orange juice to the United States surging. They have a compliant pending with the WTO regarding US farm subsidies, and if they win that case, they should be able to export even more to their largest trading partner. And let’s not forget the fact that Brazil and India have the two most stable governments of all the emerging markets in the world and how attractive that fact is. I am very bullish on the real, and I don’t think we have seen the last of its rise.