The possible benefits of holding Brazilian short-terminstruments or Brazilian reais may have been overlooked bytreasurers as a result of the perceived contagion risk at the macrolevel over the past eight months.

During the bout of concern over Europe's debt problems inmid-September, the real weakened to U.S. $1.95 from U.S. $1.54 inlate July. The latest reading at U.S. $1.72 shows considerablepotential for the real to appreciate against the greenback overcoming months. In addition to the impetus favoring all risky assets(the tide lifting all boats), the Brazilian real has the wind inits sails as the result of other fundamentals.

First, Brazil's president, Dilma Rousseff, is demonstratingsteady resolve to continue the policies and priorities of hersuccessful predecessor, Lula da Silva. These efforts continue toattract institutional funds, particularly to Brazilian equities andinfrastructure-related bonds, which also benefited as of Decemberfrom the elimination of the tax on financial transactions (IOF tax)due from foreigners.

Second, Brazil will be the center of the universe for billionsof soccer-loving people throughout the world when it hosts theWorld Cup in June and July of 2014. This fact may be lost on NorthAmericans, but putting on this event means Brazilians have to beready to welcome the world as they never have before.

The country is investing in infrastructure and cleaning up theshanty towns (favelas) of Rio de Janeiro, and the process is notalways pretty. The occasional pushback from organized crime tothese efforts is predictable, but it's a radically different storyfrom what is happening in Mexico, where drug cartels act with nearimpunity, much as they did in Colombia before President Uribe tookoffice. Perhaps it would be more appropriate to compare Brazil'scrime reduction efforts to what Rudolph Giuliani did as mayor ofNew York City.

Third, demand for Brazilian short-term instruments is notlimited to foreign institutional funds and hot money. There is alittle understood relationship between Brazil and Japan, with tensof thousands of Japanese citizens raised in Brazil living in Tokyo.The appetite for carry trades from Japanese retail investors andtraders is well known. Carry trades allow these investors to buythe currencies of countries with high overnight yields and sellcurrencies with low overnight yields. The latest investment figuresshow Japanese investors have moved out of euro-denominatedpositions—to the tune of more than U.S. $10 billion over the pastsix months—and switched much of that to carry-rich currencies likethe Australian dollar. Japanese banks and retail brokers arestarting to promote the Brazilian real as a safe destination forsuch carry trades, particularly as the yen begins to weaken againstthe U.S. dollar and the Brazilian real continues to gain againstthe U.S. dollar.

Fourth, Brazilian stock exchange and futures market operatorBM&F Bovespa is close to launching a state-of-the-art tradingplatform (Puma) with help of the Chicago Mercantile Exchange. Thismulti-million technology initiative, along with measures thatenhance direct market access and co-location, is setting the stagefor robust liquidity growth from algorithmic traders, which willproject Puma's technology past Brazil's borders, to the rest ofLatin America and beyond.

Despite the bullish outlook for this South American nation,treasury executives should also be aware that Brazilian authoritieswould prefer to see the real's appreciation stall. Last week,Brazil's finance minister, Guido Mantega, and President Rousseffexpressed concern over the pace of the real's appreciation (up 9%relative to the U.S. dollar so far this year). We expect Brazilianauthorities to wage a war of words to try to contain the real'sappreciation but seriously doubt they will go as far as Swisscentral bank officials, who threatened in 2011 to sell unlimitedamounts of Swiss francs to curb its ascent relative to theeuro.

It is too early to know if Europe's latest (and most credible)effort to deal with the Greek debt problem will prove sustainable.Regardless of what unfolds in Europe, Brazil is moving on. In lightof what is taking place in this Latin American giant, it makesperfect sense for corporate treasuries with Brazilian real exposurenot to lose too much sleep trying to repatriate such capital ifthey can avoid it. For those without exposure, gaining someexposure also makes sense, particularly if the liquidity outlook isfor six to 12 months out.

Javier Paz, a senior analyst at Aite Group, writes abouttechnology, regulatory and business trends from a wealth managementperspective.