USD/BRL: Fiscal fundamentals continue to be fragile – Rabobank

According to analysts from Rabobank, the Brazilian Real is suffering from fiscal developments after the presidential elections. They still think the USD/BRL will be traded at 5.30 by end-2022 and by end-2023.

Key Quotes: 

“We still see the USDBRL at 5.30 by end-2022 and by end-2023. We still see the USDBRL at 5.30 by end-2022 and by end-2023.”

“The US dollar has recently seen huge swings in tandem with the Fed's views on the US economy, dragging commodity currencies like the BRL along with it, while other advanced economies' central banks struggle to keep up with the Fed's hiking cycle. Despite this, Brazil's external accounts relatively remain in good shape, with a historically low current account deficit (3.3% of GDP) that is easily financed by FDI (4.0% of GDP). However, fiscal fundamentals, particularly debt sustainability, continue to be fragile.”

“Following the elections, discussions about a transition constitutional amendment bill (granting the president-elect the authority to promote social transfers above the spending cap), worth BRL 198 billion per year, impacted the FX market over the last five weeks, causing the BRL to fall from second to fourth best YTD performance among 24 major EMFX currencies.” 

“We believe the BRL has the potential to remain under pressure and reach 5.30 by the end of 2022 and end of 2023. If a credible fiscal policy outlook is announced in 23H1, we may see a partial and temporary reversal of this dynamic.”