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The shelter with a currency accent — June 2012

Episode

The extreme

For three months running, domestic money knew how to do only one thing: flee. First into the classic defensives, then into real estate funds. In June, the defensive instinct held — but the shelter changed address. Now the refuge wore the face of a commodity, and more specifically a commodity priced in a weak currency. The uncomfortable detail was that no one yet knew whether this was risk appetite returning or merely the arithmetic of a yielding real. In numbers: the Commodities (BRL)/IBOV ratio jumped from z 1.29 to 2.42 — more than one deviation in a single month, the largest displacement in the structure. The same ratio in dollars barely moved (from −0.74 to 0.13). The dollar closed at R$ 2.049, with an anomaly of z 3.28, the currency's third extreme reading in a row. The Perene Risk Index leapt from 18.8 to 57.4 while the intermarket reading marked strong reduced risk.

What happened next

The test came quickly. In September, the currency calmed — dollar at R$ 2.028, without repeating the anomalies above 3 deviations — and the commodity's premium in reais deflated alongside it: Commodities (BRL)/IBOV pulled back from 1.70 to 0.95. It didn't collapse; it wilted. By December, cash was already returning to what breathes with the cycle: Finance/IBOV advanced 1.69 deviation and the Perene Risk Index leapt from 20.6 to 78.6. The shelter emptied out. But the ratio didn't die: a year later, in June 2013, Commodities (BRL)/IBOV climbed even higher, to z 2.78 — and this time the dollar version rose with it (from −1.95 to −0.69), a sign of price strength, not just currency.

What did not happen

June's refuge was not the return of appetite. Anyone who read the leap in the Perene Risk Index — from 18.8 to 57.4 — as recovered confidence would have been wrong: the intermarket stayed in strong reduced risk, and the cyclicals sank further against the non-cyclicals (from −0.66 to −1.22). Nor was the premium permanent. When the dollar relaxed in September, much of it evaporated. The asset wasn't leading; the currency was leading.

The honest verdict

June 2012 asked the right question — appetite or currency? — and the answer took a year to arrive in full. The ratio in dollars lagged the ratio in reais, and that lag was the clue: much of the shelter was arithmetic. But not all of it. The strong-currency version did end up rising too. The honest read is uncomfortable: a ratio in reais at the extreme is a question, not an answer — only the dollar version tells you whether what moved was the asset or the money.

Continue reading: The stimulus that didn't impress (Sep 2012) · Commodities in reais · The dollar as a regime thermometer →

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