USD/BRL: Political woes partly offset by stronger fundamentals – ING

The BRL remains vulnerable but it is supported by the stronger fundamentals seen in external accounts and inflation, according to Gustavo Rangel, Research Analyst at ING.

Key Quotes

“Political risk intensified again in Brazil, with President Temer perilously hanging onto power amid new corruption allegations. Considering the uncertainties associated with another change in power in Brazil, the selloff in local assets has been relatively mild.”

“The CB also has enough firepower for FX intervention to stabilize the BRL, should demand for FX hedge surges in the coming weeks/months.”

“Still, the political crisis has clearly harmed prospects for fiscal enhancing reforms and, as a result, for a robust economic recovery. The monetary easing cycle should continue, albeit more tentatively, assuming the USD/BRL does not overshoot towards 3.5, staying around its medium-term equilibrium, close to 3.2-3.3.”