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The latest bout of volatility, on the back of possible tweaks to the spending cap and creative ways to finance further fiscal spending, have led USD/BRL to retest the 5.80 mark. Nonetheless, economists at CIBC expect the USD/BRL to break below the 5.00 level the next year.

Key quotes

“We regard the continuation of fiscal and administrative reform discussions as positive for the BRL, and do not discount a break below the 5.00 and back to the 4.50-4.80 range on their potential approval and the country’s privatization agenda in 2021.”

“We foresee the BCB intervening on recent spikes above 5.60 and limiting room for cuts beyond the current 2.0% Selic rate. The market has now accounted for over 300bps in rate hikes for the next year amid lingering fiscal risk concerns. Moreover, the BCB emphasised the fiscal trajectory (not the spending cap) when discussing forward guidance. This statement signals extreme caution and supports the idea of rate hikes in 2021.” 

“On the economy, recent upside on the back of economic activity surprises and the inflation spike to 3.9% YoY in October should also fuel expectations of an end to the easing cycle.”

 

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