Investors look more positively on the country as political uncertainty vanishes, improving BRL’s prospects.
We update our BRL view, expecting USD/BRL to fall to 3.05 in 1M (3.20 previously), 3.00 in 3M (3.40 previously), 3.00 in 6M (3.60 previously) and 2.90 in 12M (3.80 previously).
A major downside risk for our new USD/BRL forecasts is a promptly improving economy on higher commodity prices, while a more hawkish Fed is an upside risk.
Assessment and outlook
The positive news last week has improved sentiment towards the Brazilian economy. President Michel Temer has escaped the fate of his predecessor Dilma Rousseff. With 263 votes against 227, the lower house of parliament quashed the motion to put Temer on trial. Therefore, the pressure arising from the corruption scandal surrounding Temer appears to have eased, giving him more room for economic reforms, one of which is essential – the pension overhaul to improve the country’s fiscal stability.
Vanishing political noise has pushed the BRL up 4% versus the US dollar within the past 30 days and improved sentiment should see portfolio inflows return. Due to the abrupt relief in political risk, we expect a near-term rally in the BRL and accordingly make sharp revisions to our short-term USD/BRL forecasts: 3.05 in 1M (3.20 previously) and 3.00 in 3M (3.40 previously). Yet, a stronger USD due to a more hawkish Fed is a clear upside risk for our short-term USD/BRL forecast.
As the current account remains in deficit (albeit shrinking) and we expect the central bank to cut rates by 200bp in H2 17, we expect the BRL rally to come to a halt in the medium term, finding equilibrium in the long term at 3.00 in 6M (3.60 previously) and 2.90 in 12M (3.80 previously).
