By Ashish Advani As an exotic Forex trader, I’m constantly searching the globe for opportunities in the world’s smallest, most overlooked economies.

It’s my job to find these countries and identify their trends so I can either buy or short their currencies in the Forex market. These emerging market or “exotic” currencies tend to have less volume, so their currencies have the potential to move a lot faster than your normal major currencies.

Frankly, I don’t care if these smaller currencies are rising or falling. I can make money either way as long as I can find a sustained trend.

So where can you find sustained exotic trends right now?

As you probably know, most exotic currencies sank right along with the majors for the better part of the last year. In fact, some of my fellow Forex traders made a killing just going long the dollar versus most exotic currencies.

However, that looks like it’s all about to change. The “strong dollar story” has already started to fall apart since March. And it looks like the dollar is going to continue to weaken overall for at least several months.

The easiest way to play the falling dollar is to buy the exotic currency that looks to recover first from this global recession.

Here’s the good news: I’m starting to see major signs of recovery for a few specific exotic currencies – including the Brazilian real.

$661 Million Flowed Into Brazil in Just the Last Two Weeks

So why Brazil?

For starters, let’s look at Brazil’s cashflows. The Central Bank of Brazil (BACEN) just reported net FX flows into Brazil through June 12. The figures show that net FX inflows declined to $110.9 million in the second week of June, from $550 million in the first week.

Now this may not sound like good news. But if you take a step back you’ll see a very different picture…

In the first half of June, commercial surplus was driving the net FX flows. That surplus actually amounted to $866 million, which was four times larger than the net financial outflow right now (or $205 million).

On top of that, the net inflow of $661 million in the first half of June 2009 was better than the net outflow of $143 million a year ago.

In other words, more money is flowing into the country this year than in June of 2008. This means Forex traders around the world are starting to recognize the promise coming out of Latin America’s largest economy.

More capital flowing into Brazil is VERY good news for the Brazilian real going forward.

China – Brazil’s Quiet Benefactor

As you’ve heard Chuck say here in FX University many times, China looks like it’s going to be the first country out of this global recession. Indeed, China is one of the few countries where I’m seeing true signs of “green shoots” right now.

And fortunately for Brazil, as China recovers, it has been buying up goods from countries around the world. China started ordering more goods from Brazil in February of this year. Ever since, Brazil’s economy has been improving.

In fact, in my opinion, China is the biggest contributor to Brazil’s recent increase in cashflow this month. Specifically, China is buying Brazil’s iron ore, airplanes, and even raw materials and agricultural products.

In short, Brazil is benefiting from China’s growth. And this is only the beginning. In the months to come, I see China buying even more of Brazil’s goods.

On top of that, Brazil also boasts a very wise central bank that has behaved prudently for the most part. With a strong central bank at the helm to control inflation and manage these cashflows, I expect great growth stories to come out of Brazil in the next few quarters.

This all will lead to significant strengthening of the Brazilian real.

How to Buy Into Brazil’s Strength

This Brazilian real story should continue to play out for several months, as the dollar continues to sink.

Indeed, that’s why I recently recommended our Currency Capitalist readers buy into Brazil’s strength with a long-term play that offers 6.5% APY interest. This long-term currency play also lets you invest in the Brazilian real indefinitely tax-free, until you’re ready to collect on your investment. Members, please check your recent issue for full details, if you haven’t already.

However, there is another strategy you can use to buy the Brazilian real for the long run. If you’re just looking for a quick and easy way to buy the real this afternoon, you can buy the WisdomTree Brazilian Real ETF (NYSE: BZF) right through your normal stock brokerage account.

There is very little on the horizon that will put a dent in Brazil’s growth story. Even if the Chinese growth story stalls a little and the Brazilian orders slow down a bit, the long-term growth prospects in Brazil are tremendously strong.

Bottom line: stay long Brazilian real and short U.S. dollar.

Yours in FX Profits,
Ashish Advani

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