Brazil: Mid- and long-term prospects for the BRL look brisker - Danske Bank

Analysts from Danske Bank expect the Central Bank of Brazil easing to go on further. They project USD/BRL at 3.15 in 3M, 3.10 in 6M and 3.05 in 12M. 

Key Quotes: 

“The major sentiment driver remains political turbulence, linked to the allegations against the President, Michel Temer, weighing on the likelihood of passing the social security reforms as well as on economic confidence.”

“Brazil’s central bank (the BCB) has been aggressively cutting rates as firm disinflation continued. The BCB cut the Selic Target Rate by 100bp to 8.25% in September. Prices increased just 2.5% y/y in August 2017, its lowest in 19 years. Given the momentum in disinflation, the BCB could lower its inflation target in the near-term. While we expect monetary easing to go on further through 2017 and 2018, the continuing political turbulence could stop short- and long-term fiscal adjustments, which could push up the so-called neutral real interest rate, pushing the BCB to smoother monetary easing path.”

“Political turbulence has been driving the BRL over the past months. Currently, the BRL has been under pressure amid the renewed political uncertainty. While the attractive carry is still present, its appeal should diminish on further monetary easing and political turbulence. Mid- and long-term prospects for the BRL look brisker on an improving CA balance, economic recovery and attractive carry, which is set to remain.”

“As a result, our USD/BRL forecast is 3.15 in 3M, 3.10 in 6M and 3.05 in 12M. This is more bullish than market expectations. The most important negative risks are domestic, while positive risks include a stronger recovery of the Brazilian economy, fast implementation of reforms and continuing high iron ore demand from China.”