USD/BRL: Rallies are unlikely to last, nosedive to 4.82 is on the cards – Credit Suisse

Economists at Credit Suisse turn constructive on the Brazilian real, and see potential for the recent USD/BRL move to extend to 4.82 in coming weeks – with energy and agricultural commodity prices in the driver’s seat. Political and COVID-19 risks will persist, and might drive USD/BRL spikes back to 5.15-5.20, which they would look to fade.

USD/BRL spikes to 5.15-5.20 to find sellers

“We think that rallies in USD/BRL back towards 5.15-5.20 will rapidly find sellers and we would add to shorts there. Meanwhile, we think a break below the 14 Dec 2020 lows at 5.0122 is in the cards in the near future: this would open the way for a test of the June 2020 lows around 4.82.”

“The following points drive our thinking: Risks of a loss of interest rate support are low. Rising agricultural prices support further BOP strength. While it is not a direct driver of BRL strength per se, we also note that the lack of a strong directional trend in the USD, and in particular the limited prospect of dollar upside – as the FOMC waits for the data fog to clear – represents an additional source of support for the two drivers mentioned.”

“We continue to see two key local sources of uncertainty for BRL, which might at times provide the catalyst for spikes in USD/BRL. Political risk is dormant, but far from gone. Our take on the latter risks has not changed, but in the meanwhile the stronger than expected growth and trade developments seem to be easing market concerns around the impact of potential new fiscal spending measures. Covid infections remain high and vaccinations are progressing at a slow pace. This overall suggests that it will not be feasible to rule out the possibility of further shutdowns in coming months.”