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Coronavirus will impact Brazil as well though a slight acceleration in growth is expected in 20/21. BRL is expected to remain weak as an emergency rate cut could increase downward pressure on BRL, according to economists at ABN Amro. USD/BRL trades at 4.664.

Key quotes

“Most analysts now expect another 25 bp so-called ‘emergency’ rate cut in Brazil as well. We think this might be a risky move.” 

“The impact of a further rate cut on economic growth is probably limited, while there is a clear risk that this will lead to a further weakening of the currency, which is already under pressure due to increased risk aversion.

“While inflation remains low in Brazil, it did jump from 3.3% yoy in December 2019 to 4.3% in January 2020 and 4.2% in February. While this is still around the central inflation target for 2019 of 4.25%, it means that real interest rates are now close to zero.” 

“Emerging market currencies, including the real, will probably decline given that weaker global growth and the risk-off environment are negative for these currencies. We expect the real to remain weak in Q1 and Q2, while FX interventions will likely dampen the weakness. 

“Our new USD/BRL forecasts are 4.75 for Q1 and Q2, 4.6 for Q3 and 4.5 for Q4.”

 

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