USD/BRL remains heavily undervalued – MUFG

Analysts at MUFG Bank, explain that the Brazilian real is driven by several factors, but domestic issues are still sources of concern. They forecast a gradual recovery of the real against the dollar over the next quarters but they warn the scenario is under continuous assessment. 

Key Quotes:

“Brazil improved its performance in May compared to its peers driven by three factors: i) Central Bank heavy intervention when USD/BRL got close to 6.0000, followed by its governor statement about being prepared to curb volatility and avoid BRL detaching from its peers; ii) positive mood abroad with the reopening of the economy in several countries and iii) reduction of political noise once a video of a cabinet meeting didn’t show anything compromising for President Bolsonaro that could have triggered demand for his impeachment.”

“USD/BRL remains heavily undervalued as it is the worst EM currency so far this year. Thus, there is room for further upside if such positive scenario continues. However, we don’t see BRL recovering much further given we see numerous limitations to this appreciation trend with numerous potential sources of concern.”

“Our call of 4.5000 by the end of 2020 is consistent with a positive environment with the world emerging from the health crisis. But, given several domestic problems, USD/BRL could well end weaker than our 4.5000 forecast. Our scenario is under continuous assessment.”