USD/BRL: Hawkish BCB to provide further anchor to the real – Credit Suisse

There is a strong consensus expectation that the Banco Central do Brasil (BCB) will raise its policy interest rate by 100bps at today’s monetary policy meeting. Economists at Credit Suisse agree with this consensus expectation and think that a 100bps rate hike and a hawkish stance should be supportive for the Brazilian real. On the other hand, political noise and fiscal policy uncertainty remain the main risks for the BRL.

Focus on the Copom meeting

“Most investors and analysts think the Copom will increase the pace of rate hikes to 100bps per meeting, starting with the policy meeting today.”

“We think the Copom could, at today’s meeting, use its forward guidance to leave the door open for further hikes in clips of 100bps. This should be supportive for the BRL as it would suggest that the Copom thinks it will end up delivering the policy rate hikes that are currently priced into the curve.”

“We still think our USD/BRL 5.00 near-term target, and 4.82 Q3 target look right given the likelihood of further major increases in the BRL carry. The biggest external risk to our view would be a China-related slump in global commodity prices/EM sentiment. A move above 5.40 in USD/BRL would force us to reconsider our thinking.”