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Analysts at CIBC, forecast the Brazilian real will depreciated further against the US dollar in the short-term. They see USD/BRL at 5.50 in Q2 and at 5.00 in Q1 2021. 

Key Quotes: 

“USD/BRL continued its upward trend since our last publication, approaching the 6.0 mark, following a Supreme Court investigation on President Bolsonaro and his family. The scandal already caused the resignation of the former head of the federal police and the Minister of Justice Sergio Moro, via alleged political pressures by the president. This situation will likely dominate Brazil’s political environment for a few months, while investigation leaks will continue to be harmful for those with long BRL positions.”

“On the monetary policy front, the BCB cut the overnight rate by 75 bps to 3.00%, against market consensus and our 50bps forecast. Moreover, it also signalled another rate cut – but not larger than 75bps – at its next meeting. As a result, we’ve revised our Selic rate forecast to 2.0%-2.25% by the end of 2020. The clear dovish stance by the BCB, despite larger fiscal risks, should also put pressure on the BRL in the short-term.”

We note the ongoing large portfolio outflows, as political turmoil crowds local headlines. Hence, we revised our USD/BRL forecast for Q2 to 5.50.”