USD/BRL: upward pressure during next months - Danske Bank

Analysts from Danske Bank forecast the USD/BRL at 3.40 in three months, at 3.60 in six months and at 3.80 in twelve, is a forecast more bearish than market expectations.

Key Quotes: 

“Brazil’s economy has not seen a brisk and solid recovery yet, as the Q1 17 data show another slump in GDP (-0.4% y/y) versus a 2.5% y/y drop a quarter earlier. The q/q change was positive: +1.0%. The economy got support from record growth in agriculture, while industrial production, services and retail were in negative territory. We keep our below-consensus forecast for real GDP growth in 2017 at 0% (consensus now at 0.5% versus 0.7% in Q1 17), while expecting a pick-up in growth in 2018 to 2% (before 2.2%).

“Brazil’s central bank (the BCB) has been aggressively cutting rates as firm disinflation continued. Prices increased just 3.6% y/y in May 2017 versus the seven year high of 10.7% y/y in January 2016. 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 current political turmoil could stop short- and long-term fiscal adjustments, which could push up the so-called neutral real interest rate, jeopardising more aggressive cuts by the BCB.”

“The BRL has been under pressure amid the emerging political uncertainty. S&P’s credit rating warning in May pushed the BRL even lower. While the attractive carry is still present, its appeal will diminish on further monetary easing and political turbulence. We continue to see the cross facing slight upward pressure in H2 17 given the monetary easing by the central bank in the face of weak growth, a possible slowdown in the Chinese economy and weakening commodity prices.”

“Our USD/BRL forecast is 3.40 in 3M, 3.60 in 6M and 3.80 in 12M. This is still more bearish than market expectations. The most important negative risks are domestic, while positive risks include a stronger recovery of the Brazilian economy than expected and continuing high iron ore demand from China.”