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USD/BRL could fall to 3.65 – TDS

FXStreet (Córdoba) - Cristian Maggio, Head of Emerging Markets Strategy at TD Securities notes that important risk remains on the table for the Brazilian real, but it could strengthen pushing USD/BRL to 3.65 by year-end.

Key Quotes:

“Market optimism was washed out by a triplet of events last week. First of all, continuation of the impeachment talks (strike 1), then a Fitch downgrade and the affirmation of a negative outlook (strike 2) and finally renewed rumours that Levy may not complete the year in office (strike 3 and BRL is out). The BRL collapsed by 3.2% on Friday and closed at 3.9036, but failed to break technical levels closer to 4 that would have opened vast lands for USDBRL to rally into.”

“You don’t need the BCB to overtighten to keep USDBRL in check. You only need consistency of policies and time. In that case, our 3.65 forecast for yearend is not too unthinkable, although risks remain skewed to the upside.”

“The BCB will make an announcement on rates on Wednesday and we think the most reasonable outcome will be holding the Selic rate. The market is priced for no change and the analysts’ consensus is also unanimous on this view. We agree that rate hikes would be a sub-optimal way to deal with inflation at this point, while BRL weakness requires more political stability, as mentioned above.”

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