USD/BRL: Long-term prospects for BRL look brisker - Danske Bank

According to analysts from Danske Bank, the outlook for the Brazilian real is modestly positive. They see USD/BRL at 3.75 in 3M, at 3.65 in 6M and 3.50 in 12M. 

Key Quotes: 

“In addition to the developments in emerging market sentiment and its impact on BRL flows, we expect all eyes to be on the presidential election in October 2018. The primary concerns faced by a new president remain fiscal reform, unemployment and security. The trade war issue is likely to dominate the external economic agenda.”

“Brazil’s central bank (the BCB) has turned semi-hawkish, keeping the key rate unchanged as global turbulence in the emerging market universe hit the BRL. The BCB has tamed BRL’s volatility by providing an abundant FX swap line. We do not expect the BCB to use key rate hikes to support the BRL before USD/BRL climbs over the critical level of 4.00.”

“Sour global emerging market sentiment and trade war concerns have been driving the BRL over the past month. Currently, additional pressure on the currency is coming from domestic political issues. Long-term prospects for the BRL look brisker on an economic recovery and still attractive carry, while we believe pre-election woes are set to weigh further on the currency in 2018.”

“The most important negative risks have now shifted from the idiosyncratic ones to global ones. Upside risks include a more dovish Fed and US President Donald Trump’s retreat from his hawkish trade war rhetoric. The Brazilian economy and a rapid approval of reforms by the government, stabilising the political situation ahead of the presidential election, would also be BRL positive.”