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The Brazilian real remains increasingly a domestic story, and fiscal uncertainty leaves us looking for a retest of the 5.8076 30 October 2020 highs in the USD/BRL pair.

Key quotes

“Our bias is to expect the BCB to deliver in line with the aggressive tightening expectations priced in, for now, and at least as long as the fiscal side of things remains highly uncertain. A different outcome in fact, with e.g. the BCB hiking less than 50bp on 17 Mar, would prove negative for BRL and ultimately self-defeating for the inflation mandate.”

“The approval of the Emergency Bill for Constitutional Amendment (PEC) bill is key: the bill allows for the disbursal of a new round of aid while at the same introducing measures to automatically curb spending in other areas. Markets have been focused on the risk that these two key components of the bill might be disentangled and voted separately. The situation remains highly fluid, and it appears that the two measures will not be voted separately. This remains a live issue, and as long as it is unresolved, we suspect that BRL stability might be elusive.”

“We see now risks of USD/BRL retesting the 5.8076 high from 30 October 2020: in the event of a break higher, the 5.90 area last seen in May 2020 would become a valid target zone.”