It seems not long ago that forecasts for dollar-to-real were in the 4s and 5s. Much has changed however, and despite political uncertainty prevailing in Brazil, the real is now set to move to more expensive levels, at least according to BNP Paribas’ chief Latin America strategist, Marcelo Carvalho.
Carvalho believes that the real will strengthen against the US dollar to R$3.0 by year-end, from this morning’s exchange rate of R$3.175. A move to $3.0 would take Brazil’s currency to levels not seen since the first half of 2015 and would mark a near-6% rise in its value. The real currently holds a year-to-date gain over the dollar of 2.5%.
“The Brazilian real will be much stronger in 2017 than markets anticipate,” says Carvalho.
The real had experienced a rather frightening, single day devaluation in May following revelations of bribery and corruption involving the country’s president, Michel Temer. In moves likened by traders to those experienced during the 2008 financial crisis, the real fell by 8% on May 18th to R$3.4 as the news about President Temer spread – an enormous one-day move in a currency.
As commendable as it may seem that all losses experienced on that potentially game-changing day had been clawed back by mid-July, it should be acknowledged that much of USD/BRL’s recent decline (the real’s recent rise) is the result of a tumbling US dollar generally, and not because of anything particularly positive about the Brazilian political or economic outlook.
Against a different major currency, the euro, the real has not recovered from May’s turmoil and is down by 8% on the year. EUR/BRL continues to make attempts at the important R$3.8 level which has held the real up since last November.
Against a regional peer, the Mexican peso, the real remains little changed on its May 18th lows and is down nearly 12% on the year.
In terms of Brazil’s economic situation, despite the economy growing 1% in the first quarter, ending the longest recession in Brazil’s history, annualized growth rates remain negative. Brazil’s economy contracted in the year ending March-31 by 0.4%, although that does represent a vast improvement on annualized contraction of more than 5% in the final quarter of 2015 and the first of 2016.
Looking forward, a weak dollar, which typically leads to stronger commodities prices, should be supportive of the real given Brazil’s status as a major exporter of soybeans, oil, iron ore and sugar. Furthermore, “a weaker dollar will spur international capital flows to emerging markets,” says BNP’s Carvalho.
Politically, while President Temer was seemingly let off the hook earlier this month after Brazil’s Congress voted marginally for him to avoid standing trial on corruption charges, Brazil’s political situation will remain tense, at least until next year’s election.
Brazil has a fairly calamitous recent political history, with the country’s previous president, Dilma Rousseff, impeached in 2016 and almost a third of the current president’s cabinet under investigation for alleged corruption. Political troubles not only place a natural cap on real appreciation, but also threaten economic reforms and mean that significant, unexpected moves in the real are possible.
Business owners negatively impacted by future real appreciation should read our guides to managing FX risk.
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