USD/BRL continues to grind back towards monthly highs in the upper 5.80s

• USD/BRL, which rallied from around 5.50 to around the 5.75 level last week, hit highs in the 5.80s on Monday.
• Higher US yields plus Brazilian government shutdown concerns are being touted as weighing on BRL.

USD/BRL, which rallied from around 5.50 to around the 5.75 level last week, has picked up where it left things off and continued to grind higher on Monday, reaching peaks above the 5.80 level during US trading hours. The pair is now only about 1.7% from its monthly highs in the upper 5.80s; note that a 1.7% move in one day would be far from extraordinary in BRL, with USD/BRL amongst the more volatile of the USD/EMFX majors.

Driving the day

Rising US government bond yields has not been helpful for EM currencies over the past few weeks, BRL included, so as long as US yields keep trucking higher, risks for USD/BRL remain tilted towards further gains. In that regard, Biden’s infrastructure package announcement on Wednesday will be of importance – if expectations are for a greater amount of borrowing, this will put upwards pressure on yields.

Note a number of domestic factors are also being cited as driving recent depreciation in the Brazilian real. The budget that was announced last Thursday has been labelled as “unfeasible” by economy minister Paulo Guedes and likely to result in a government shutdown before the end of the year; according to analysts, the budget would force the government have to function on not even half of what experts consider the minimum level to avoid a shutdown. Elsewhere in Brazil, the Bolsonaro administration continues to face challenges with the defence minister tendering his resignation and the foreign minister also touted to be on the verge of tendered theirs.

Looking ahead, the aforementioned announcement from Biden will be a key event, but so will US data in the form of the March ISM manufacturing survey on Thursday and the March labour market report on Friday. Out of Brazil, February budget data out on Wednesday will be of note, as will February Industrial Output and March trade data, both out on Thursday.