Brazil: BRL will continue to perform relatively well near-term - Danske Bank

According to analysts from Danske Bank, there are signs that the recession in Brazil is abating while the see USD/BRL at 3.25 in one month and at 3.40 in six months. 

Key Quotes: 

“There are tentative signs that the recession in the Brazilian economy is abating. Real GDP fell by 3.8% y/y in Q2 versus a fall of 5.4% y/y in Q1. Short-term indicators such as retail sales and industrial production are suggesting that the economy has bottomed in Q3. As a result, we raise our real GDP growth forecast to -3.5% and 1.4% in 2016 and 2017 respectively (from -3.8% and 1.2% previously and Bloomberg consensus of -3.4% and 1.0%).”

“The new central bank governor Ilan Goldfajn, who was sworn in as Brazil’s central bank president in June, has come across as a hawk. The central bank (BCB) kept its leading Selic rate constant at 14.25% on 31 August. However, inflation pressures have started to ease with the stabilisation in the BRL and the increasing slack in the economy. Dependent on approval of the fiscal spending cap, we think the BCB will cut its policy rate, maybe not at the October meeting as we previously expected, but surely at the November meeting.”

“Our out-of-consensus call for a strengthening of the BRL vis-à-vis the USD over the past few months has proved right (although admittedly the strengthening was stronger than we expected). The real is now in line with its fair value. Looking ahead, we think that the BRL will continue to perform relatively well in the near term due to both solid iron ore demand from China, fiscal consolidation and a hawkish central bank policy. However, over time, the real will face upward pressure from declining but still high inflation and a possible Fed tightening. As a result, our USD/BRL forecast is 3.25 in 1M, 3.30 in 3M, 3.40 in 6M and 3.45 in 12M. The most important negative risks are the failure to pass fiscal consolidation measures and early tightening by the Fed in December 2016.”