Email of the day (1)
"Good morning. Would you say that the BRL daily move constitutes a key day reversal?"
David Fuller's view Yes, and thanks for pointing it out. USD/BRL clearly shows a sizeable key day reversal following an extremely consistent uptrend until some climactic acceleration recently. You may have also noted that the move started with a smaller upside key day reversal on 29th February.
What are the implications?
Our standard reply given this overall action is that the downside key has capped the upside move for at least the short term. Usually, we like to see some follow through the next day for confirmation and that is not yet apparent although we will not know for sure until after the US / Brazilian trading hours.
The Brazilian government did intervene to stem currency flight, as you will see from this WSJ article: Brazil Counters Outflows, Depreciation. Here is a sample:
"The unresolved European crisis is the main reason for weakness," said Wanderlei Muniz, a trader at the Onnix brokerage, which is based in southern Brazil. Foreign investors are pulling out of Brazil, he explained, just as they are pulling out of other emerging market countries to seek the safe haven of U.S. Treasury bonds.
Recent weakness for the real has also come from sharply declining global prices for commodities such as metals and oil. Brazil is a major commodities exporter.
According to central bank figures released earlier Wednesday, foreign investors made net withdrawals of $5.2 billion from Brazilian investment positions during the period May 1-18. If that value remains unchanged through the end of the May, it would be the biggest monthly outflow since December 2008, when investors removed $6.3 billion following the September collapse of Lehman Brothers.
The heavy withdrawals have done nothing to dent the Brazilian government's hefty $370 billion trove of foreign reserves. However, according to Galhardo, they have led to "a touch of panic" in the currency market, especially among importers, exporters and companies with exposure to overseas debts, all of whom are active in both the foreign exchange market itself and as well as the futures market.
"The central bank has given a clear sign that it wants to hold the line on depreciation at BRL2.10 against the dollar," said Luciano Rostagno, chief Latin America strategist for WestLB bank in Sao Paulo. "The Brazilian government will surely seek to limit the impact of capital flight by continuing to use this kind of central bank intervention."
This adds to my view, also mentioned yesterday, that recent events in markets have been panicky and therefore climactic for at least the short term. Consequently, Brazil and other oversold markets should at least experience technical rallies. Whether or not this turns out to be the beginning of a support building process prior to a more meaningful recover depends on events, not least those in Europe on which everyone is focussed. However, I would not rule this out and markets may have commenced a bottoming out process.