Brazilian Real Bucks The Trend

From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley

We’ve been pounding the table about the broad-based strength from the US Dollar since earlier this month. Due to the momentum of its recent move, we believe this rally could have legs beyond just the near-term... But we'll address that when the time comes.

For now, we're positioned to take advantage of this swift rebound from the Dollar through a handful of USD crosses currently offering favorable risk/rewards. 

Though the Dollar gave some of this month's gains back last week, our short-term outlook remains higher. As I write this, many G-10 currencies like the Euro, Pound, Aussie, and Canadian Dollar are all rolling over relative to USD. 

We’ll be revisiting this theme plenty as it plays out over the coming weeks to months.

But in the meantime let’s focus on a currency pair that’s bucking the trend, the US Dollar-Brazilian Real $USD/$BRL.

Here’s a weekly bar chart of USD/BRL:

While the US Dollar gains on almost all other currencies, it can’t seem to gain any traction at all vs the Real. The relative strength from the Real - especially amid such broad dollar outperformance vs just about every other currency, has been impossible to ignore as the pair has been moving straight lower for several months now. 

The performance from BRL has been impressive, to say the least, and really stands out in our universe of USD crosses as it's been the clear leader over both long and short timeframes all year. This is illustrated well by our bubble chart:

Notice how it's sitting in the upper right-hand corner of the chart? That's because it's been the top performer year-to-date... as well as just last week.

But a single data point doesn’t change our overall bias for the USD over the near term. We still think the Dollar is headed higher from a tactical perspective.

However, the USD/BRL does offer a solid risk/reward opportunity to sell Dollars.

Yes, sell dollars.

We can think of shorting the USD/BRL as a hedge against our long Dollar positions, or just as a vehicle to bet on a favorable and clearly defined risk/reward setup.

Either way, we can be short the USD/BRL pair below the Dec. ‘20 lows near 5 with a downside target of 4.17. And we’ll be watching for a break below the key extension level ~4.83 for confirmation of the move.

Both longs and shorts have been working in the equity markets and there’s no reason to believe they can't work in currency markets too.

Thanks for reading. As always, let us know what you think. And be sure to download this week’s Currency Report!

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