BRL has been one of the top beneficiaries of the pro-EM price action that followed US elections, along with TRY. Economists at Credit Suisse lower the USD/BRL target range to 5.18-5.65 but continue to see medium-term concerns about the fiscal outlook ultimately limiting the scope of BRL strength.
Key quotes
“The prospect of a more active BCB intervention in a month where flow dynamics are expected to be unevenly in favour of USD/BRL upside represents an important supportive change relative to our assessment in late September.”
“Domestic political risk has been benign in recent weeks, with the passing of the first round of municipal elections seen in markets as providing a more politically supportive backdrop for the fiscally conservative economic policies promoted by Finance Minister Paulo Guedes. All things equal this represents a tentative shift from the less market-friendly tone that dominated the domestic political debate in Q2 and Q3, and could prove further BRL supportive if it were to persist. The possibility of a rapid adverse swing in political risk bias remains in our view considerable, but in the meanwhile, we acknowledge this development as constructive on the margin.”
“Overall, we see the balance of factors as limiting the potential for BRL strength over the medium-term and leaving the scope for renewed weakness intact. However, we acknowledge that the external market environment has become more favourable for EM currencies, and on the local front, we note that increased BCB intervention prospects are an important factor in the light of the ongoing market focus on the BRL negative implications of the ‘overhedge’ unwind flow. This leads us to lower and narrow our USD/BRL target range: we see the downside as limited to around 5.18, and see spikes to the upside as likely limited to around 5.65.”
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