USD/BRL: Fiscal risks to weigh on the real – TDS

The BRL is one of the strongest major currencies since the start of Q2. Still, the risk of further fiscal deterioration keeps economists at TD Securities on a cautious footing toward the real. As such, they don't see BRL as necessarily cheap around 5.50 – and certainly not at 5.00. For that, the Selic rate will need to be at least 300bps higher. 

The BCB to deliver a 75 bps rate hike

“We and the market expect the BCB to hike the Selic rate by 75bps. There is some risk that the BCB moves with a more aggressive hike today and/or continues to signal a continued pace of aggressive tightening in the near term. The exact implications of the BCB's current ‘partial normalization’ stance are still unclear. It does, however, imply the potential for rapid rate hikes to come before achieving a sustained pause.”

“Over a shorter-term horizon and with our inkling a hawkish surprise could arise today, initial support for today can be found at the end-April low at 5.3290. A move below this would put USD/BRL into a consolidation zone that is loosely bounded by the 38.2% Fibonacci retracement level of the trading range in place since December 2019.” 

“Looking higher, we note that the 50% Fibo of this same range comes in at 5.5042 – an area (+/-) that has served as a notable pivot in recent months.”

“The risk of further fiscal deterioration keeps us on a cautious footing toward the real. As such, we don't see BRL as necessarily cheap around 5.50 – and certainly not at 5.00. For that, we think the Selic rate will need to be at least 300bps higher.”