USD/BRL to end the year at 5.10 as the real shows its strength – MUFG

During June the Brazilian real appreciated against the US dollar from 5.2212 to 5.0131. According to economists at MUFG Bank, BRL is set to continue to appreciate in near-term and expect the USD/BRL to end the year at the 5.10 level.

Hawkish normalization of the monetary policy

“GDP posted growth of 1.2% in the Q1 and despite the worsening of the pandemic in March, GDP might come slightly positive in the Q2. Market participants are revising 2021 GDP estimates to over 5.0%, anticipating for this year a recovery back to the pre-pandemic level.”

“The Central Bank adopted a hawkish view and it has already increased the Selic policy rate by 225 bps this year and promised to normalize the monetary policy, which for us means another 225 bps hike through to October when the rate would reach its neutral level of 6.50%. This stance is making the carry trade more attractive.” 

“The better fiscal situation than expected provoked by higher tax collection and the perspective of a lower debt/GDP ratio. Additionally, the political noise provoked by the pandemic probe at the Senate is not halting the economic agenda as the bill for the privatization of Eletrobras electric energy company passed and there was progress on the tax and administrative reforms.”

“In this environment, investors are unwinding part of their long USD positions. This better environment came earlier than expected, but it will not last until the end of the year. That’s why we are keeping our call of 5.1000 at the end of 2021, which is weaker than the current rate.”