Deutsche Bank Says Borrow Australian Dollars, Buy Brazil’s Real

By Oliver Biggadike

May 20 (Bloomberg) -- Deutsche Bank AG, the world’s biggest currency trader, recommends buying the Brazilian real with funds borrowed in currencies such as the Australian, New Zealand and Canadian dollars.

The Aussie’s exchange rate against the real has a lower correlation with stocks than other currency pairs such as the dollar and yen, lowering the risk that swings in equity markets wipe out profits on the trades, Deutsche Bank’s Adam Boyton told reporters yesterday at a briefing. Speculators bought Japan’s currency last year as the decline in global stock markets pushed them out of investments in Australia and New Zealand that were funded with yen-denominated loans.

“The market’s pricing too much recovery, but whenever you go and express that trade in the market, you’re up against this correlation of foreign exchange to equities,” Boyton, a currency strategist in New York, told reporters at a briefing to discuss his outlook for currencies this year. “You’ll see a lot more interest in carry with G-10 on the funding side and emerging markets on the investing side.”

The Australian dollar was little changed at 77.44 U.S. cents as of 8:34 a.m. in Sydney, after reaching 77.84 cents yesterday, the highest since October. The Aussie fell 0.1 percent to 1.585 reais, extending its decline this year against the Brazilian currency to 2.9 percent.

Carry is the income earned from investing at a higher rate of interest than the cost of borrowing to finance the investment. It declines as the value of the funding currency increases, and vice versa. Investors who borrowed in Australian dollars to buy in Brazil on Dec. 31 would have earned 5.9 percent so far this year, the best Australian dollar-funded return among the 16 most-traded currencies, according to data compiled by Bloomberg.

Rate Advantage

Australia’s benchmark interest rate of 3 percent is 7.25 percentage points lower than Brazil’s 10.25 percent. The 30-day correlation coefficient between the Australian dollar-real exchange rate and the Standard & Poor’s 500 Index is close to zero at 0.03, and below the 0.78 correlation between the yen- Aussie cross rate and stocks. A correlation of 1 would mean the currencies moved in lockstep with the equity index.

“What’s the point of picking up a 3 percent interest-rate differential by being long Aussie and short Japan in a world where the exchange rate can move by that much in two days?” Boyton said at the briefing. Japan’s benchmark rate is 0.1 percent.

The Aussie-yen exchange rate has bigger swings than Aussie- real, which has risen or fallen more than 3 percent in a single day only twice this year, Bloomberg data show. By contrast, Aussie-yen experienced such swings 12 times, as well as having more consecutive two-day or three-day increases or decreases exceeding 3 percent.

To contact the reporter on this story: Oliver Biggadike in New York at obiggadike@bloomberg.net