Traders jumping on the Brazilan currency bandwagon

02/02/2010 9:40 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Guess there’s no such thing as a little volatility when it comes to the Brazilian real.

In December traders were calling the real the world’s most overvalued currency.

Now the consensus prediction, according to a Bloomberg survey of 19 currency analysts, is that the real will climb by as much as 6% against the dollar by March 31. Yep. Not the end of 2010. But the end of March.

That big a swing in a currency over so short a period of time would seem unlikely except that options traders are reversing short positions against the Brazilian currency at the fastest pace in 10 months, according to Goldman Sachs.

 On Monday, February 1 Goldman said that the real’s slump was over. The currency had dropped almost 8% against the U.S. dollar in January and fell 3.7% in the last week of the month alone.

Why the reversal?

First, traders believe that the big move in such a short time has been overdone leaving the currency oversold and ripe for a bounce back.

Second, the Brazilian central bank, which had been selling the currency in the last months of 2009, seems to have halted that effort. The bank was selling the real in an effort to stop appreciation that had taken the real up 33% in 2009 and was badly hurting Brazilian exports by making them more expensive to global customers.

Third, economic growth in Brazil is holding up better than many had feared. The worry was that efforts by Chinese officials to slow that country’s economy would hurt Brazil. China has recently become the biggest customer for Brazil’s exports. But those worries have receded as traders have decided that domestic economic growth in Brazil is strong enough to keep the economy humming even if China cuts back on buying. The consensus forecast is that Brazil’s economy will grow by 4.8% in 2010.

Both of the Brazil picks in my Jubak’s Picks portfolio, Ambev (ABV) and Market Vectors Small-cap Brazil ETF (BRF), which is added to the portfolio yesterday, are up this morning.

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