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Tuesday, September 18, 2007

Brazil and Safe Havens

Ok, as the US starts to slow, and Japan and Germany follow suit, the interesting question is going to be to try and follow who in the emerging markets sector can hold up under the pressure. Brazil will be an interesting test case in this sense. Bloomberg today:

Brazil's real rose after the Federal Reserve cut the benchmark U.S. lending rate more than expected, making yields on Brazilian bonds more attractive and buoying expectations that demand for the country's exports will remain strong.

The real rose to a six-week high, climbing 2.2 percent to 1.8770 per dollar at 3:41 p.m. New York time after the Fed cut the benchmark rate by a half-percentage point to 4.75 percent. The real touched 1.8730, the strongest since Aug. 3. Brazil's currency has appreciated 13.9 percent this year, the second- biggest gain among the 16 most actively traded currencies tracked by Bloomberg News.

``A half-point cut sends a very clear message the Fed is not just looking at inflation, it's also making economic growth a priority,'' said Rogerio Chequer, who helps manage about $150 million of emerging-market stocks and bonds at Atlas Capital Management in White Plains, New York.

The real may strengthen to 1.85 reais per dollar over the next month, said Ronie Marcelo Germiniani, proprietary trading manager in Sao Paulo at Banco Itau SA, Brazil's biggest non- government bank in terms of market value.

The rate cut reassured investors that the world's largest economy will continue to grow, preserving demand for Brazilian exports such as orange juice, steel, coffee and soybeans.

Brazil's trade surplus widened to $3.54 billion in August from $3.35 billion the previous month, according to the Trade Ministry. That exceeded the $3.1 billion median estimate in a Bloomberg survey of 18 economists.

Record Exports

Exports rose to a record $15.1 billion last month from $14.1 billion in July, while imports also increased to a record $11.6 billion from $10.8 billion in July, the ministry said.

Brazil's 11.25 percent benchmark rate is among the highest in the world and is more than double the U.S. rate, helping lure capital to the country's fixed-income market.

The yield on Brazil's benchmark zero-coupon bonds due in January 2008 fell 2 basis points, or 0.02 percent, to 11.1 percent, according to B

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