The US dollar did rally against the Brazilian real on Wednesday but gave back about half the gains as we continue to see the greenback get hammered against this particular currency. Emerging markets in general have done fairly well this year due to the fact that the EM currencies have been extraordinarily oversold. At this point, it looks like we are going pretty far in the opposite direction, as markets tend to do. Ultimately, I think this is a market that will continue to see a lot of wild swings, and that makes sense considering that we have seen so much in the way of volatility elsewhere.
Keep in mind that the Brazilian real is an expression of risk appetite, as Brazil is a commodity-driven currency. It is also the gateway for South America when it comes to currency trading, so this an expression on most things South America, with maybe the exception of the Chilean peso. Because of this, I think that the market will continue to see the US dollar through the prism of risk appetite more than anything else, and we are starting to see a turnaround. In fact, you can almost make an argument that we started to see risk appetite express itself in emerging market currencies before we did the stock market. You have seen the same behavior in other currency such as the South African rand and Indian rupee.
From a technical analysis standpoint, if we break down below the 5.25 level, there is probably not too much stopping this market from going down to the 5.10 level, and then possibly even the 5.00 level. On the other hand, if we turn around and break above the top of the candlestick for the session on Wednesday, it opens up the possibility of a move towards the 5.40 level above, and maybe even testing the 200 day EMA, depending on how long it takes to get there. You should always position size carefully, but at this point I think it is especially prudent due to the fact that there is so much in the way of volatility in markets overall, not just this particular situation. The Brazilian real will get hammered if we suddenly see a major “risk off” type of situation, but if we continue to see people willing to take risk, it is possible that we will get the breakdown.
