Plato's Bunker

Its no news that FX market is probably one the of the hardest to "predict". Maybe that's why I like it most, so I can be wrong very often and use this excuse..."its hard". Seriously, "predict" is not the perfect word to use for most of the financial assets because its a impossible task and carries a burden of a exact value, as many expect it to be. Instead, what is possible is to access all important variables and estimate the likely path, the odds,  levels and so on. Even so its nto easy, but we do it. We need to (at least to answer those friends and relatives that always ask "Should I buy USD now or later". I like to compare the FX market with weather forecast - now weather seems to be a more exact science!!!  We have longer term forecasts that has to do with cyclical factors like the 4 seasons. For the time horizon of weeks and months they measure pressure, currents, water temperature and many others to gauge what the weather will likely

There has been a very big ongoing disconnection lately between stocks and the real economy in Brasil. If in on hand we have seen stocks making new highs (nominal in BRL) and business confidence improving, on the other hand jobs, industrial production and IBC-br, a gauge for the GDP, seems to all have stalled. We could discuss if prices and expectation leads the economy or the other way around, and in fact looking for the historical data both things happen. Sometimes expectations and stocks are high and lead, sometimes not, specially if we add political risks that strongly affect how the economy will be five or ten years form now, which pretty much seems to be the case right now with the pension reform still ahead in the pipeline. The reform (or not) could affect future prices and the economy in many ways. Country risk (and CDS) could sky rocket affecting the currency, treasury rates, corporate funding, depressing investments and so on if not approved. On the other side if approved we c

After a big stress this year BRL seems to be trying to recover some ground recently. If it wasn't always hard to deal with EM currencies, a very important election turns things to a nightmare.  Will try here to break through some of the noise to find some sense of the recent market. As the candidates are finally showing up in the media recently, market seems to be realizing that there is no chaotic scenario even with a less liked candidate. To make things even better, a perfect candidate in the market's view is showing some life now. That might be too early but some risks must be discounted in the price after all... technically USDBRL is trying to break some important levels now. comparing with a EM basket since last year is possible to see that a lot of bad news have been priced... specially if compared to a more fundamental long term view... also looking through a model based on PPP, country risk and commodities... I ran a simple simulation with

It seems to be clear from the last few days that USD index (broad and narrow) is not dead. After  a long cliff since Trump's election it seems now to have found a bottom in the short term, and probably medium term also. Signs of a bit stronger inflation in US and weaker than expected Euro numbers have worked their way through the currency market despite the narratives of US twin deficits that had been hovering around. As usual, narratives and bondwagon effect have their influence in the short run, specially when supported by rate differences. Some charts below with recent trend and short/medium term aspects to watch. USD spot index...trend is (or was) your friend? short positioning of Non commercial players 2 years rate difference between US and other G7 German DAX/SPX relative value and EUR lag year %   Euro/US core CPI difference and EUR lag Year % and finally unemployment rate difference between G7 and US. Despite the short term influence

It's been 6 months since I last wrote about global trade growth, so it's time to have a look again. After a pretty good recovery since early 2016 and reaching 5% growth on year over year basis it seems now that it has lost some momentum, at least for a while. But what makes me more worried about next few months ahead is that most US and Germany economic surveys are at multi year highs. That should be a good news if it wasn't for he fact that historically those indexes hardly hold much longer at those levels. And when they turn they usually impact global trade, financial markets and stocks for a while. Let's look first at some global trade indexes: CPB Global trade volume looks to be loosing some steam... RWI Index also has slowed. Now some surveys in Germany and US: Germany IFO and Europe Consumer Sentiment.  US surveys also at multi year highs: Now some industrial production indexes around the globe: EM looks p

I read this news (link below) yesterday that indicates that BRL might be very expensive according to three models from Deutsche Bank. Though I don't have access to those models metrics, it got my attention because that information doesn't really fit very well with some simple models I run. I know there are lots of ways to model FX and as everyone might know its not a very easy market to figure out, specially for EM, where lots of feedback loops between country risk and FX rate happens and you can have long and short term models. Another point, specially for the PPP metric is the timeframe chosed. Anyway, just decided to post my findings here because they contrast with the DB picture. They might be right but here is my view: Business Insider (Australia) link for the news:  https://www.businessinsider.com.au/currency-valuations-september-deutsche-bank-2017-10 That's DB chart... My Behavioral model based on Commodities and CDS (YoY %) PPP metrics based on C