Buy the dips in USD/BRL – BAML

FXStreet (Edinburgh) – Analysts at BAML have recommended buying the dips in the pair following the government’s preference for a weaker BRL.

Key Quotes

“The new Brazil policy framework involves tighter monetary and fiscal policy, and a weaker exchange rate induced by less central bank intervention”.

“Since the new economic team led by Finance Minister Joaquim Levy was announced last year, the central bank has increased its benchmark rate by 275bp to 13.75% and a primary fiscal surplus target of 1.1% of GDP has been set for 2015”.

“Both represent a significant tightening of policy. The central bank is expected to keep hiking rates – by 85bp according to the futures market and by 50bp in our baseline scenario – and even if the primary surplus ends up at 0.8%, as consensus expects, it would still represent more than a 1pp fiscal adjustment versus the 0.6% primary deficit in 2014”.

“The economic team is cushioning the recessionary effects of tighter policy by letting the exchange rate adjust more rapidly and freely to its equilibrium level by reducing its intervention in currency markets. Based on Compass, we estimate the equilibrium level is 3.35”.

“We recommend fading BRL rallies below 3.05 given the government’s revealed preference for a weaker exchange rate. We find currency forwards to be a better alternative to FX options despite the recent decline in implied volatilities”.

Analysts at BAML have recommended buying the dips in the pair following the government’s preference for a weaker BRL…

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