Cuantificación de los valores de exposición

This section would not be complete without a look at some of the emerging nations, often grouped together as the BRICs which, of course, includes China where we started. Here we need to consider the remaining members, namely Brazil, Russia and India.

During the first decade of the 21st century the BRICs group contributed over one third to world GDP growth. In the next decade Brazil’s economy will be larger than Italy. India and Russia will individually be greater than Spain, Canada or Italy.

By the end of the decade these countries will probably contribute more than 50% to world GDP which is extraordinary and these countries will be dominating world economics for decades to come.

Brazil

Brazil and the Brazilian real is a relatively new currency only adopted in 1994 following a series of disastrous changes in currency with no less than eight between 1942 and 1994. The constant change of currency was mostly due to rampant inflation and, until 1999, Brazil’s currency was pegged to the US dollar on a one to one rate.

It was then uncoupled and left to float freely in the exchange markets and is a classic example of zero to hero, with the country having recovered from a deep and damaging recession which had been triggered by the default of close neighbour Argentina in 2001. This, in turn, caused a debt crisis in Brazil from which it slowly recovered throughout the remainder of the decade, as tight monetary policies and strict credit control, allowed it to emerge as one of the powerhouse nations in Latin America.

As a country Brazil has the largest economy in Latin America but economic stability has not been easy, as it had an economy often characterised by high inflation. Inflation which has finally been brought under control using tight monetary policies and more market based economic strategies.

The cost of reducing inflation however, also led to a deep recession during the early part of the decade. Since when Brazil has become the star of the region, with a booming economy which continues to grow bringing wealth to the people of Brazil and moving millions out of poverty.

In terms of the economy, agriculture forms a major part of its exports as it is the largest producer in the world of many of the so called soft commodities such as sugar cane, coffee, tropical fruits and orange juice. In addition, Brazil also has the largest commercial herd of cattle. Brazil is also a major producer of corn, cotton, cocoa and tobacco, along with soybeans and is second only to the US in terms of production of this increasingly valuable commodity.

With over half of the country covered in forest, timber products too also form a major part of the Brazilian export economy and therefore, just like Canada, Australia and New Zealand, the Brazilian real is classified as a commodity currency. But, in this case, one that is associated with the soft commodity sector.

There is, naturally, a strong and positive relationship between the Brazilian real and the US dollar, given Brazil’s commodity based economy, so as commodity prices rise then the Brazilian real tends to strengthen against the US dollar. This also helps to explain in part the dramatic economic expansion of the last few years as commodity prices have soared on an extended bull run.

Furthermore, rising demand from Brazil’s largest export market China which, like Brazil continues to expand at an ever increasing rate, continues to increase demand for both hard and soft commodities. Monetary policy is set and managed by the Central Bank of Brazil, a

relatively new bank having only been established in 1964. The bank has been given the responsibility for both monetary policy and the setting of interest rates to manage inflation,

which is a key priority. Inflation has been rising in the last few years requiring a consequent increase in interest rates as a result.

This has led to the bank raising rates on a regular basis to control consumer spending as the nation has become wealthier. Interest rates in Brazil even rose to an eye watering 26.5% in 2003 but, at the time of writing, have settled back to 7.25% thereby making the Brazilian real a target for the carry trade.

However, unlike the Australian or New Zealand dollar, there are pitfalls in trading this

strategy using the real because no matter how attractive the rate differential, the usual risks still apply. For example, lower commodity prices or a sudden change in risk sentiment. However, the biggest drawback to trading the Brazilian real is the lack of liquidity.

It is a lightly traded currency, with extremely small volumes on the futures market, which makes it difficult to exit when markets are volatile. Nevertheless, it is well worth considering provided you are aware and understand the risks involved.

Brazil is a fascinating and dynamic economy which has not just survived, but has become one of the star performers of this emerging market group.

Russia

Russia, just like Brazil has an economy dominated by commodities and, also like Brazil, has seen dramatic changes in the last 25 years. Russia has had to deal with the dissolution of the old Soviet Union and consequent collapse of communism. This was then followed by a traumatic move towards a free market economy in the late 1990’s following years of state control before Russia was finally accepted as a member of the International Monetary Fund in 1992.

Not long after however, Russia suffered its own financial crisis in 1998 with the Russian currency, the ruble declining by almost sixty percent overnight. This plunged Russia into an economic spiral of inflation and economic decline which it only survived through tight fiscal policy. In much the same way as Brazil has done.

At the time of the crisis the Russian government had the foresight to create a stabilisation fund which, by 2007, had grown to 127 billion dollars. With the largest foreign exchange reserves in the world, the Russian government has also attempted to protect the economy from sudden changes in commodity prices as commodities have been at the heart of Russia’s recent rapid expansion while they continue to develop a market driven economy.

Whilst energy commodities such as oil and natural gas are the life blood in this vast country rich in natural resources, Russia is also a major exporter of soft commodities, particularly in the grains market and was an indirect contributor to the recent bullish trend in this market sector. Grain prices soared due to a damaging and lasting drought which forced Russia to implement an export ban on its grains. This in turn sent prices sharply higher in the short term.

In the last few years the economy has moved rapidly, with growth rates in excess of between 7% and 8% per annum. Much of this growth has been due, once again, to rising commodity prices in both oil and gas, which have boosted revenue flows into the country as a result.

These inflows have created a strong trade balance with a massive build up in currency reserves.

The central bank in Russia is the CBR, the Central Bank of the Russian Federation. It was formed in 1990 following the collapse of the Soviet Union and the bank likes to maintain a tight grip on the Russian ruble. Much like the SNB the CRB too is quick to intervene to prevent the ruble becoming too strong.

As a result, the bank uses the exchange rate mechanism to control the value of the ruble, in particular against the US dollar which has been weakening as the Federal Reserve pursues its policy of quantitative easing. The CBR has the same problem as many other Central Banks, namely inflation.

However, unlike Western economies it has been a continuous struggle for the CRB to bring inflation under control. In the last twenty years the CRB has only managed to bring this down to single figures twice, but still well above those of most Western economies. In addition, the CRB has had one other major problem to deal with, namely the currency peg, which still remains in place. The Russian ruble is managed against a basket of two currencies, the euro and the US dollar, in the ratio 55% to 45% respectively.

Over the years the CBR has re-iterated its desire to see a free floating currency, but as each year passes, this objective becomes less and less likely. The CBR has an inherent fear of a free floating exchange rate, particularly given their strong relationship to volatile prices in the oil market, which are then reflected in the currency. As the oil price increases, so the ruble strengthens and the CRB intervenes. The CRB has also intervened when it considered the currency too weak. Despite making the right noises the bank has yet to make the psychological jump to a free market in foreign exchange.

This is now becoming an increasingly difficult problem for the CRB. The dilemma for the CRB is whether to focus on trying to control inflation, which is difficult when Russia’s export market is so dominated by commodities, in particular oil and its close relationship to the dollar. Alternatively, should the bank continue to control the exchange rate mechanism using the peg.

The question now is whether the CRB will ultimately allow the ruble to free float in the currency markets. The latest suggested date for a free float is now 2015 – but only time will tell.

A tentative date of 2012 was originally proposed to float, but plans were shelved following comments from prime minister Putin who suggested that a fully fledged floating exchange rate would only be introduced 'cautiously' given the currency’s exposure to the sudden swings in commodity prices.

For the time being we will have to wait for the Russian ruble to join the other leading currencies as a free floating currency. This decision may be deferred for many years given Russia’s huge commodity export market of oil, energy and grains. The impact a free floating currency can have on such an economy is the reason why Russia is so hesitant. At the moment the economic and political risks are simply too high.

Nevertheless this may happen in due course, and once it happens traders would then have another strong commodity currency to add to their trading armoury.

India

Our final BRICSs country is India.

With a population of just over one billion people, it is the world’s largest democracy and, in the last decade, just like the other BRICs, has seen its economy grow at an ever increasing rate, propelling the country to become the world’s tenth largest economy and third largest in Asia.

Again India’s currency, the rupee, could be considered another commodity currency, since the country is rich in both base minerals, such as iron ore, manganese and bauxite, but also

agriculture which forms the core of its export markets, along with textiles.

However the economy is gradually changing. Increasingly, India is seen as a leader in high tech industries in the computer industry as well as developing one of the fastest growing car

manufacturing sectors in the world.

With a diverse and extremely well educated population, coupled with low labour costs, the country is able to provide a range of outsourcing solutions for companies around the world.

This is likely to be a continuing theme, over the next decade, as the Indian economy expands and develops from its traditional base.

However, just like many other economies, India has struggled to keep inflation in check with consumer spending rising fast, particularly on high tech goods and services. In addition, increases in commodities has meant that the Indian authorities, in the form of the central bank (the Reserve Bank of India) have struggled to keep inflation below ten percent. The same dilemma suffered by both Russia and Brazil.

The bank has been forced to act quickly in the last few years raising interest rates from a low of 3.25 percent in 2009 to the most recent level at 7.75% in 2013.

The currency of India, the Indian rupee is also a pegged currency. However, the rupee has been pegged in a variety of ways throughout its chequered career. From 1950 until 1975 the

currency was pegged to the British pound, at which point it was decoupled following the collapse of the gold standard.

It was then linked to a basket of currencies, primarily those of its major trading partners.

However, following a long period of devaluation the currency was then switched to a 'managed float' regime. In theory, this means it is a free floating currency which is only managed, in times of volatility or when economic conditions dictate an intervention and adjustment of the exchange rate.

This system seems likely to continue for some years to come given India’s strong growth which is fuelling consumer spending. This in turn is leading to rising inflation as commodity prices continue to soar, a common theme for all the BRICs. Rapid expansion brings an explosion in the middle classes with rising consumer spending, inflation, and the associated problems of currency management.

Most books on forex usually stop at this point but in the next chapter I am going to focus on three distinct geographical regions, which deserve a section of their own. These are Africa, the Middle East and South America. They are all hugely important in different ways, but with a common theme - commodities.

Chapter Thirteen