Brazil real to take near-term support from improving economic outlook: Reuters Poll By Reuters
© Reuters. FILE PHOTO: A woman looks at an electronic board showing recent fluctuations in market indices on the floor of the B3 Brazilian Stock Exchange in Sao Paulo, Brazil, April 3, 2019. Photo taken April 3, 2019. REUTERS/Amanda Berubelli
By Gabriel Buren
BINOS ERES (Reuters) – Brazil’s currency is likely to enjoy some near-term support from faster economic growth and progress on reforms, according to a Reuters poll, despite the possibility of less favorable interest rate spreads in the future.
The real last month rose to its highest level in a year after many forecasts improved, and major fiscal changes proposed by President Luiz Inacio Lula da Silva’s government made progress in Congress.
The riyal is expected to rise another 0.6% in three months to 4.81 against the US dollar from 4.84 on Tuesday, according to the median estimate of 26 foreign exchange analysts surveyed from June 30 to July 3.
Eric Martinez, Latin America forex and interest rate strategist at Barclays (color :).
Within 12 months, the real is expected to lose 3.2% to 5.00 against the US dollar, but this would be a relatively small decline for the Brazilian currency, with it still trading near its mid-point since 2020.
Some economists have warned of a contraction in the real’s “carry trade” value next year, given that Brazil’s central bank is likely to open a phase of gradual policy easing soon, following marked inflationary easing trends in recent months.
This would reduce the significant spread between Banco Central do Brasil’s benchmark interest rate, which is currently at 13.75%, and the US federal funds rate range between 5%-5.25%. The spread could narrow further if the US Federal Reserve raises again.
However, the positive narrative for the domestic economy remains at the fore, as a more moderate scenario for consumer prices may allow policy makers to begin unwinding the very hawkish stance faster than other major economies.
One of the questions for traders is whether the real can follow the success story of its main counterpart in the region, the Mexican peso, which is seen as only shedding part of the big gains it made since 2020 by July 2024.
The Mexican currency is currently priced near its highest value in more than seven years and has gained 20% so far in 2023, buoyed by investment from multinational companies leaving China. The Brazilian real rose 9.2%.
(For other stories from the July Reuters FX Poll:)
(Reporting and polling by Gabriel Boren in Buenos Aires; additional polling by Sarupia Ganguly, Anita Sunil and Veronica Khongwer in Bengaluru)
