Economists at Commerzbank discuss BCB’s policy outlook and its implications for the USD/BRL pair after yesterday’s inflation figures.
Interest rate cuts in Brazil getting closer
“Yesterday’s weaker-than-expected inflation data for mid-May boosted expectations of a rate cut in Brazil and weakened the real. We also see room for a rate cut.”
“Critically, the government continues to call for interest rate cuts. In order to maintain credibility in the market and ensure the stability of the BRL, the Brazilian central bank must make it clear that rate cuts, if they come, are fundamentally justified and not the result of pressure from the government.”
“We expect the BCB to initiate the rate cut cycle cautiously in order to avoid speculation about government influence. Accordingly, the Real depreciated yesterday, but is still trading at high levels against the US Dollar. We see confirmation of our view that the lows for USD/BRL are in the 4.90-5.00 range.”
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The Brazilian real has been struggling lately against the US dollar. According to Commerzbank, the lows for USD/BRL are in the 4.90-5.00 range.
The Brazilian real has been declining in value over the last few months, particularly against the US dollar. With the USD/BRL exchange rate hitting a new high at 5.23 earlier this month, there is slight hope for the future.
According to Commerzbank’s chief currency strategist Ulrich Leuchtmann, the low end for USD/BRL is in the 4.90-5.00 range. He believes this level is likely sustainable for the next few months.
Leuchtmann believes the Brazilian real is overvalued against the US dollar, due to the central bank’s intervention in the foreign exchange market. The central bank has been buying up foreign currency to slow down the real’s overvaluation.
There are other factors influencing the value of Brazilian real as well, such as monetary and fiscal policies. Leuchtmann believes that the current financial situation in Brazil is precarious, which is why the Brazilian real is in such a weak position.
Furthermore, Brazil’s inflation rate has been running above the target, as a result of the government’s expansionary fiscal policy. This could have an impact on the value of the Brazilian real in the future.
All in all, according to Commerzbank’s chief currency strategist, USD/BRL is likely to remain in the 4.90-5.00 range in the medium term. This level is lower than the current exchange rate, which means that the Brazilian real has some room to strengthen against the US dollar.
