USD/BRL: Further recovery of the real for now until optimism fades – ABN AMRO

The Financial Markets Research Team at ABN AMRO, see the USD/BRL pair trading year-end around 3.7, following the presidential elections in Brazil.

Key Quotes:  

“In the period January 2018 until the end of August 2018, the Brazilian real lost more than 25%. Fear of an escalating trade war between the US and China, higher US dollar, higher US yields and political uncertainty in a numbers of emerging markets were the main reasons behind this weakness. Since then it has recovered remarkably (by 13%). The main reason has been lower election uncertainty because of a high probability that Jair Bolsonaro would become the next president. Investors have high hopes that he would bring the necessary changes. We remain more sceptical.”

“In the near-term, it is likely that the real will rise further especially as it has taken out an important technical resistance level. However, when the optimism fades we think that the real will give back some of its recent gains. We keep our year-end target of USD/BRL at 3.7. For next year we expect a further strengthening of the real mainly because of a weaker US dollar, lower US Treasury yields and a more favourable environment for emerging markets. We maintain our end of 2019 forecast for USD/BRL at 3.2.”