Brazil: Medium- and long-term prospects for the BRL look brisker - Danske Bank

According to analysts from Danske Bank, the Brazilian Real (BRL) has been under pressure amid the renewed political uncertainty. They see that while the attractive carry is still present, its appeal should diminish on further monetary easing and political turbulence.

Key Quotes: 

“In Q2 17 Brazil’s economy saw its first positive growth print in three and a half years (+0.4% y/y), expanding further in Q3 17 (+1.4% y/y). The economy got support from growth in agriculture and improved private consumption. We raise our 2017 GDP growth forecast to +0.8% y/y from +0.3% y/y previously.”

“The major sentiment driver remains political turbulence, linked to the allegations against the President, Michel Temer, weighing on the likelihood of passing the social security reforms as well as on economic confidence. Yet, the country’s government is willing to proceed with the pension reform in 2018, despite the recent vote delay. The presidential election in 2018 will add to domestic uncertainty, as former President Luiz Inacio Lula da Silva could join the race.”

“Brazil’s central bank (the BCB) has been aggressively cutting rates as firm disinflation continued through 2017. We expect monetary easing to slow down in H1 18. At the same time the continuing political turbulence could jeopardize short- and long-term fiscal adjustments, which could push up the so-called neutral real interest rate. This is pushing the BCB to stop monetary easing in H2 18.”

“Political turbulence has been driving the BRL over the past months. Currently, the BRL has been under pressure amid the renewed political uncertainty. While the attractive carry is still present, its appeal should diminish on further monetary easing and political turbulence. Medium- and long-term prospects for the BRL look brisker on an improving CA balance, economic recovery and attractive carry, which is set to remain.”

“Our BRL forecast remains more bullish than market expectations. The most important negative risks are domestic and the presidential election would add to BRL volatility and decreasing demand from China on iron ore exports, while positive risks include a stronger recovery of the Brazilian economy and fast approvals of reforms by the Government.”