USD/BRL seen at 5.25 by year-end – Rabobank

Economists at Rabonank believe Brazil is going to see quarterly gains from the tirhd quarter while see the central bank taking a long pause. All in all, USD/BRl is expected to trade at 5.25 and 4.90 by end-2020 and end-2021 respectively.

Key quotes

“With better activity and Covid-19 outlooks, we now upgrade our 2020 GDP forecast to -5.9% (from -7.3%), but downgrade our 2021 GDP forecast to +3.6% (from +4.5%). The latest hard activity data had already been recovering more than thought. Now, with less Covid-19 jitters, we see a stronger recovery in 20H2.”

“A less repressed demand makes us now see 2020 CPI inflation at 1.7% (from 1.5% before) and 3.2% by end-2021. These figures reflect the lack of demand as seen through the labour market.”

“We still see the Selic rate at 2.00% by the end of the year and at 3.00% by end-2021. Despite the adoption of a formal forward guidance, and we recognise a higher probability (40% from 20% before) that the Copom could cut the Selic rate this year, we still think it is more likely that they will stay pat until 21Q3, especially amid higher fiscal noise. With a binding spending cap, they will likely hike the Selic to 3.00% in 21Q4.”

“We still expect the USD/BRL to be trading at 5.25 by end-2020 and 4.90 by end-2021. Volatility has picked up earlier than we had thought (20Q4) with the domestic fiscal noise muffling external geopolitical noise. Yet, without disruptions to the ongoing fiscal regime, and with an improving current account balance in 2020, we expect the BRL to appreciate by year-end.”