“JPMorgan strategist Hajime Kitano is skipping the 2013 predictions.
Instead, Kitano is moving the conversation forward to 2014, which he says could be the year that the Brazilian real finally crashes, enveloping the country in a financial crisis.
The reason, Kitano says, is that the real is one of the most overvalued currencies on the planet, second only to the Australian dollar.
Of course, Brazilian authorities are aware of this concern and have been quite outspoken about the overvalued real, attacking developed market central banks like the Federal Reserve and Bank of Japan for instituting easy money policies that have the pernicious side effect of driving up the value of the Brazilian currency against the U.S. dollar.
The country’s finance minister, Guido Mantega, went so far as to dub this phenomenon “currency wars” back in 2010. In that case, Brazil is definitely one of the losers.
This leads us to Kitano’s latest ruminations on the subject:
It is that time of year when we are often asked ‘What will next year’s surprise be?’ When asked this over the past few years, our reply has been a dramatic fall in the Brazilian real. This is because we considered the Brazilian real overvalued, and expected a return to average values.
Figure 1 shows the real effective Brazilian real. It has tended to fall after peaking in July 2011, but remains above its average since 1970 +2σ….”
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