BRL: Regional haven status faces tests – BNY

BNY strategist Geoff Yu argues that Brazil and the Brazilian Real (BRL) currently underpin Latin American resilience to global shocks thanks to commodities and high real rates. However, he warns that strong starting positions, policy easing by COPOM and shifting global inflation risks mean Brazil may struggle to sustain its outperformance versus regional peers.

Brazil props up broader LatAm performance

"Reports this week suggest that premiums are even rising for available oil in Brazil, up to $13/bbl above current benchmarks. For now, commodity-exporting LatAm economies will probably avoid a strong terms-of-trade shock, but high real rates are needed to maintain currency resilience, especially as the U.S. dollar’s interest expectations are starting to shift."

"LatAm currencies and equities are facing greater downside risk due to a strong holdings start to the year, but figures still look strong on an aggregate basis. This is largely due to resilience in Brazilian assets, where outperformance relative to regional peers strengthened significantly since the end of February."

"If the BRL and commodity-exposed Brazilian assets are now seen as the regional haven, then there may be a case for Brazil’s central bank, COPOM, to calibrate communication slightly at next week’s policy decision. A 50bp cut to 14.50% is expected."

"Even with such a move, real rates will remain comfortably in the double digits and help anchor the exchange rate. Duration may also start to perform better if Brazil emulates its fiscal discipline it showed during and after the COVID pandemic, avoiding excessive stimulus."

"LatAm economies have similar qualities that help shield the region from global stress. However, caution is also settling in, and we doubt Brazil can continue its current divergence from neighboring economies."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)