According to analysts at Rabobank, BRL’s rollercoaster ride has continued well past the October election, as a combination of global and local uncertainties prompted a wider than expected trading range so far in 2019.

Key Quotes

“In twelve months, BRL has lost 4% against the USD, in line with peer-currency benchmarks. Our FX models suggest that nearly all of the BRL weakening in that period is due to global drivers. The most important one is the stronger USD globally - reflecting the direct and indirect impact from the implementation (and threats) of new trade tariffs by the U.S.”

“The BRL-impact of the stronger USD was cushioned by lower expectations for the path of U.S. short-term interest rates, as well as narrower (idiosyncratic) premium implicit in Brazilian assets. The latter follows increased optimism about the outlook for economic reforms.”

“Technical factors in the local FX market have not changed materially so far this year. In aggregate, FX positions of key private-sector players have barely changed from late 2018, standing around USD 46 billion (long in USD).”

“The total amount of “FX support” (i.e. hedge and liquidity) supplied by the BCB to the market currently stands at USD 76.6 billion, just a bit lower than in end-2018 (owing to repo lines).”

“As per our forecast, we continue to look for USD/BRL at 3.70 for end-2019, as we anticipate further narrowing of premium in Brazilian assets following the approval of an effective pension reform.”

“In our view, a big disappointment in the final expected cost-savings from the pension reform could take BRL towards the level of 5.0 against the USD.”

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