USD/BRL: Slows vaccination rollout and reforms in Brazil kept real depreciated – MUFG

External environment and domestic issues hit the Brazilian real (BRL) in the last week of February, explained analysts at MUFG Bank. They forecast USD/BRL at 5.400 by the end of the first quarter and at 5.3000 by the end of the second, ending the year at 5.1000. 

Key Quotes:

“The BRL was somewhat stable during February until the last week of the month, when it depreciated driven by the external environment and domestic issues. On the external front, the concerns on the resurgence of inflation in the US increased the yield of UST, hitting BRL and other EM currencies. Meanwhile, on the domestic front, the market has become concerned with the replacement of Petrobras CEO, fearing a change in the economic policy to a more interventionist one.”

“Another source of concern was the postponement of a vote that re-introduce the monthly stipend to the poorest population together with countermeasures to provide tools to manage the fiscal accounts. The concern is with further deteriorating of the worrisome fiscal situation. BRL continues being driven by expectations, because there are no problems in flows.”

“External account remain solid with foreign direct investment well above the current account deficit and partial data in February through 19th posted a net inflow of USD 3.8 billion in the FX contracts balance. Thus, our call is BRL at depreciated levels in the first half due to the slow vaccination rollout and the discussions of the reforms, but a more appreciated currency afterwards with the progress of these issues and the weak USD globally.”