Transcript Brazilian Real Scott Noble Chris Hittesdorf Kenji Oka

Brazilian Real
Scott Noble
Chris Hittesdorf
Kenji Oka
Aubrey Gaeta
Part 1: Technical Analysis for USD/BRL
Inverted Scale
http://fx.sauder.ubc.ca
Implications for U.S Hedge Fund

Close or hedge short positions on
USD/BRL

Open long positions on USD/BRL

Goal:

Seek to profit off expected short-term
weakness in the Brazilian Real
Conclusions




Apparent resistance at 2.12
Projected Real weakness going
forward
Adequate data is available on
USD/BRL
No signal is ever clear or
guaranteed

Right now it is even less clear
Part 2: Asset Choice Model
• Decrease in the interest rate over the past 3 months
from 18% to 15.75% putting downward pressure on
the currency.
• Decreases the demand for the currency
• This country still has one of the highest interest rates
in the world.
• Inflation rate over the past few years has been 8.7%
which is very high. This could represent an area of risk
that would decrease the demand for a currency that is
unstable.
Bloomberg Data
Balance of Payment Model
 Capital
account is running at a
surplus of 1.35 Billion USD
 Trade balance is running deficit of
almost 4 Billion USD
 Upward vs. Downward Pressure
 With a larger trade balance deficit
there will be more downward
pressure on the currency
Part 3: Relative PPP Model



Shows the trend of recent inflation
rates.
The source for estimating the
expected annual rate of inflation in
the US and Brazil.
Puts weight on each years’ inflation
rate.
Historical Data (Table 1.):
Inflation Rate (CPI)
Year
2002
2003
2004
2005
2006
weight
U.S.
1.59
2.27
2.86
3.39
3.3
Brazil
12.53
9.3
7.6
5.2
4.8
5%
10%
15%
25%
40%
“Expected” annual rate of inflation
2002-2006


U.S.:
1.59(.05)+2.27(.1)+2.86(.15)+3.39(.25)+3.3
(.4)
= 2.903
Brazil:
12.53(.05)+9.3(.1)+7.6(.15)+5.2(.25)+4.
8(.4)
=5.9165
Relative Purchasing Power Parity
Model



The current spot rate of BRL (April
23rd, 2006)
=
2.1199
The expected annual rate of
inflation in the United States=
2.903
the expected annual rate of
inflation in Brazil
=
5.9165
Relative Purchasing Power Parity

PPP Spot Rate of BRL =
2.1199 * [(1+.059165)5 /
(1+.02903)5]
= 2.1199 *(1.332963 /
1.153826)
= 2.1199 * 1.15525
= 2.44902
Result from the relative PPP model



5 years into the future, the BRL is
forecasted to weaken against the
dollar.
Brazilian Real has relatively higher
inflation rate than the U.S. dollar.
Therefore, it will experience
depreciation on foreign exchange
markets.
The implication for the global firm

The firm selling products in Brazil.

They will lose their profits in 5 years.



It takes 2.44902 BRL to convert 1 USD in 5
years.
It takes 2.1199 BRL to convert 1 USD now.
The firm manufacturing products in
Brazil.

They will gain their profits in 5 years later.


They get 2.44902 BRL for 1 USD in 5 years as
their profits.
They get only 2.1199 BRL for 1 USD now as
their profits.
Part 4: International Fisher Effect


European Terms spot rate
(4/20/2006): 1 USD = BRL 2.1208
Brazilian Yield Curve (USD):


United States Notes/Bonds:


Current Price/Yield 122/5.690
Current Price/Yield 99-08 ½ /4.920
Future IFE Spot Rate:

2.1998 BRL = 1 USD
Analysis of International Fisher Effect

Future IFE Spot Rate
= 2.1208 x (1+.0569)5 = 2.1998
(1+.0492)5



So long as interest rates stay the same the Real
will weaken against the dollar.
For companies investing overseas, long term
investments would be good to make if investing in
manufacturing abroad.
However, because the inflations rates are higher
in Brazil than in the US the currency will
depreciate over the next few years meaning that
transferring Real back into dollars will not be
profitable.