Brazil: BRL’s performance in 2017 and risks ahead – Rabobank

Mauricio Oreng, Senior Brazil Strategist at Rabobank, explains that after a strong (pay-back) performance last year, the Brazilian real (BRL) posts sluggish and below-peer gains vis-à-vis the USD so far in 2017.

Key Quotes

“We estimate that global and domestic factors have given opposite FX contributions – yet in similar (absolute) magnitudes. The (strengthening) effect from better investors’ perception about the outlook for reforms - and subsequent narrowing in Brazil’s CDS spread - has been offset by the (weakening) impact of higher U.S. rates and lower commodity prices.”

“Solid figures in Brazil’s balance of payments and a slight improvement in (trade-related) FX inflows in the spot market may have provided some support for the BRL this year.”

“For now we keep our yearend BRL projection at 3.10/USD: the expected strength ahead stems mostly from a partial recovery in material costs and approval of an effective pension reform.”

“We see risks increasingly skewed to the upside, however, owing to an activity slowdown in China and the possibility of even higher U.S. rates. While the impact of an alternative (risk) scenario of failure to pass a good pension reform in Congress is hard to estimate, a stressful spike in country-risk, as well as technical factors, could well send the FX rate north of 4.00.”