Brasilian Real and the Carry trade
When we try to explain the daily fluctuations of the dollar here in Brazil, typically we seek for domestic reasons, such as election polls results, Central Bank´s sales of Swaps (USDBRL) or our interest rate, but most often the explanation is related to the trend of other currencies.
In recent months, the dollar has been appreciating against most currencies (See charts below), and around here it could not be much different since our fundamentals are not so good.
On the other hand, we have the highest real interest rates in the world, which encourages portfolio managers from other countries to invest part of their assets here; in Carry trade positions ("buy" Reais and "sell" USD) - Chart below..
To reduce the risk, reducing slightly the return, can do the Carry Trade, buying Reais and selling currencies with high positive correlation as the Australian Dollar (AUD interest rate is 3% and BRL 11%).
It is very difficult to know the outstanding of Carry trades in reais, but surely, it is big! In 2014, so far, Japanese people invested USD 2.47 billion in Uridahis funds in Reais.
This kind of trade will work well whereas market volatility is low, and the fundamentals do not worsen further.