USD/BRL: BCB unable to support the Brazilian real – TDS

Economists at TD Securities expect very little of note out of the Central Bank of Brazil (BCB) meeting and expect the central bank to sit on hold for the coming months. Regarding the currency, they expect no BRL-relevant outcomes from the meeting. USD/BRL is trading at 5.2745 after starting the month at 5.50. 

Key quotes

“We are now entering into what we feel will be a very dull period of time for the BCB, as policy is expected (by us) to remain accommodative and on hold, so long as there are no adverse external shocks that would cause the BCB to react to FX weakness. We think this is a very low probability due to an extended period of Fed dovishness, that will support EM assets and FX.”

“Brazil has shown outperformance relative to expectations for early Q3 data growth data, which is a positive development, but this is unlikely in our view to hold so substantially that Brazil becomes an outperformer (relative to the global economy) in a way that shifts the BCB's policy stance. This leaves it unlikely the BCB will be as hawkish as the rates market prices, outside of the potential for a severe external shock to BRL.”

“With Brazil rates so low and BRL underperformance still evident, despite a severe negative demand-shock that has temporarily pushed the current account balance back into surplus, we don't think the BCB can do much to support BRL at this meeting. It is also unlikely that there is any new dovish bias that would be introduced at the meeting that would hamper BRL. As such, we see it as a BRL-neutral event.”