USD/BRL has found a base – Lloyds Ban

Analysts at Lloyds Bank explains that the modest retracement in USD/BRL, from a two-year low of 3.04, may just be one sign that the pair has found a base.

Key Quotes

“For some months, many fundamental valuation metrics have pointed to an overvalued Brazilian real. Now the Brazilian central bank is contemplating ending an intervention programme that has been aimed at supporting the currency. In addition, policymakers also signalled the possibility of increasing the pace of monetary easing after lowering interest rates by 75bps in February. Such a move would likely further erode the carry benefit of holding Brazilian real.”

“Even if both shifts in policy fail to materialise, the dramatic fall in political risk, crucial in lifting the real over the last twelve months, is unlikely to be repeated over our forecast period. Still, eight consecutive quarters of economic contraction, combined with higher prices for Brazil’s key commodity exports, leaves the Brazilian real less externally vulnerable. In turn, this reduces the risk of a sharp devaluation in the real.”