Analysts at Rabobank raised their year-end forecast for USD/BRL to 3.90. They expect the pair to decrease and to convergence toward its fair value.
Key Quotes:
“While our short-term fair-value models for the Brazilian FX rate point to figures around 3.90, it is not clear if this apparently hefty “premium” (the largest in a year, according to our metrics) is just a temporary distortion or rather the symptom of a structural break. Our methodology suggests that at least some 30% of the recent USD/BRL move (all the way from just above 3.70 in mid-July to c. 4.15 in late September) follows external drivers – mainly the stronger USD globally, after the escalation of the Sino-American trade spat (i.e. involving Brazil’s main trading partners). Thus, our models cannot explain about 70% of the recent FX move.”
“Judging from the BRL reaction after an expansionary Copom communiqué, it looks like the FX rate sensitiveness to local yields could have increased. Quantifying that can prove a hard task for analysts (such as ourselves) who seek to use FX models for forecasting purposes.”
“Despite the lack of visibility for now, we still believe that a sound balance of payments, muted inflation pressures and further advances in budget reforms will keep the Brazilian economy in a group of more resilient EMs amid (what increasingly looks like) a global storm. That is another (and strong) argument to keep looking for some decrease in the FX rate after the dust settles. We are raising our year end FX rate forecast by 10-cents to 3.90 (for both 2019 and 2020), but still expect a BRL convergence towards (somewhere closer to) the fair value suggested by our models.”
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