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Analysts from Rabobank reaffirm their projection for USD/BRL of 3.70 for end-2019, “with the local optimism about reforms tempered down by an increasingly slippery global context for EMs.”

Key Quotes:  

“The BRL’s rollercoaster ride has continued well past the October election, as a combination of global and local uncertainties prompted a wider than expected trading range so far in 2019. In twelve months, BRL has lost c. 4% against the USD, in line with peer-currency benchmarks.”

“Our FX models suggest that nearly all of the BRL weakening in that period is due to global drivers. The most important one is the stronger USD globally – reflecting the direct and indirect impact from the implementation (and threats) of new trade tariffs by the U.S..”

“The BRL-impact of the stronger USD was cushioned by lower expectations for the path of U.S. short-term interest rates, as well as narrower (idiosyncratic) premium implicit in Brazilian assets. The latter follows increased optimism about the outlook for economic reforms.”

“We continue to look for USD/BRL at 3.70 for end-2019, as we anticipate further narrowing of premium in Brazilian assets following the approval of an effective pension reform. However, mixed global conditions (following a global slowdown, even amid insurance rate cuts by the Fed) are expected to affect EM assets and economies, limiting the room for a more pronounced BRL rally this year.”