USD/BRL to remain around 3.8 - BBVA

The Research Department at BBVA sees the USD/BRL pair around the 3.8 level in the remainder of the year and also during 2019, partly due to the reduction of political uncertainty after the October presidential elections.

Key Quotes: 

“The Brazilian economy will continue to recover slowly in the coming years. We expect GDP to grow 1.2% in 2018, 2.4% in 2019 and around 2.0% afterwards.”

“The gradual strengthening of domestic demand and the normalization of food prices, among other factors, will help to drive both inflation and interest rates upwards. Inflation should converge to 4.9% in 2019, above the 4.25% target for the period, after closing 2018 at 4.5%. In an environment of greater pressures on prices, interest rates would be adjusted upwards, from 6.5% to 10.0%, throughout 2019.”

“The next government will likely take measures to reduce fiscal vulnerability, although it will hardly manage to approve an ambitious social security reform. A more positive macroeconomic scenario, mainly in terms of growth, requires a more aggressive fiscal adjustment than expected and a series of reforms to increase productivity, something that now seems unlikely.”

“In the last few weeks, the exchange rate appreciated significantly, from around 4.15 to about 3.7, largely due to an (excessively?) positive perception of the scenario after the elections by the markets. Volatility may return, mainly after the elections, when the economic policy for the next four years will begins to be unveiled. We expect the Brazilian real (BRL) to float around 3.8 over the forthcoming quarters.”