For those who follow currency trading, it is not unusual to see currency notes from countries such as the United States ($), Britain (£), the Euro Zone (€), Japan (¥ ), Australia($) , Canada ($) and China (¥) taking center stage. With the dawn of the current leap year and the focus on the upcoming Olympic Games, it is virtually inevitable that at least for the time being, the whole world shifts its attention to a country located in the continent of South America…..you guessed it……Brazil!
So familiarity abounds with US dollar featured currency pairs such as EUR/USD or USD/JPY but how familiar are you with say the US dollar Brazil Real (USD/BRL) currency pair? Or, let’s take this discussion one step further and ask the question, “How can the trader benefit from the relationship between the US dollar and the Brazil Real?”
Brazilian Economic Numbers- Investing.com reports that “the Brazilian economy shrank by 3.8% in 2015 and is projected to shrink by another 3% in 2016, in what is seen as that country’s worst recession since the 1930s.” Not surprisingly the Real has depreciated all of 30% against the US dollar in the last year, resulting in an exchange rate of USD/BRL being 3.58 in mid-March 2016. Other economic indicators show:
- No tangible uptick in industry performance as a result of currency depreciation
- Falling government revenues
- Low rate of tax revenues
- Increasing budget deficit
- Rising unemployment (7.6% at the start of 2016), projected to reach double figures
US Economy Back on Track? – On the other hand, what about the health of the US Economy? These are forecasts as supplied by Kiplinger:
- Though slightly down from 2.4% in 2015, GDP growth for 2016 will be 2.3%
- The housing market should continue to strengthen as buyers hustle to beat the imminent mortgage rate increases
- There should be an uptick in business investment
A word of caution however as one ponders if most US citizens are actually feeling as if they are better off.
Bearing the above snippets of data in mind, let’s focus on the chart of the USD/BRL, 1 month timeframe below.
USD/BRL Monthly Chart
Close observation shows steady strengthening of the USD vs the BRL over the period 2012 to March 2016. To put it another way there has been a strong bullish sentiment to the point where the currency pair has appreciated from 1.6000 to 3.5819.
The trader’s task is to determine where the pair is heading next. Notwithstanding economic data predicting the continuance of a shrinking Brazilian economy in 2016 and possible recovery for the US economy, it may be foolhardy to simply jump to the conclusion that the uptrend must continue.
Here’s a key point to note. There is currently a deep retracement in the USD/BRL currency pair. It is deeper than any pullback seen over the four year period. Could we be at the top of the bearish move? Is this a reversal indicator? If so traders could profit from the ride back south. Or could the market merely be fulfilling a relatively brief correction and catching its breath before resuming the uptrend?
