USD/BRL Sees a Bounce: Economists at Société Générale Predict a Gradual Upswing
The USD/BRL has managed to stage a bounce recently; this came after the pair fell under pressure to defend the key support level at 5.01 representing lows of last August/November. Economists at Société Générale predict that the pair will gradually trend higher, but also note the possibility of an extended down move if the support level is breached.
For the USD/BRL, there is a projected upward trajectory towards 5.38 followed by predictions of 5.46/5.48. However, it is important to note that the trend line drawn since 2020 at 5.60, constitutes a crucial resistance level in the near term. Therefore, achieving an upward trend will not be without complications.
Economists at Société Générale have advised that there is only a risk of an extended down move, only if the pair were to breach the graphical level at 5.01. Therefore, it is important to keep an eye on the support level, as it could directly impact the direction of the USD/BRL.
Factors Influencing USD/BRL
Tariffs, political developments, trade wars, and macroeconomic policies, are among the key drivers that can influence the value of the USD/BRL. However, it is also important to consider currency fluctuations in relation to other economies.
The Brazilian Real is highly dependent on commodity prices, which can often experience significant volatility that ripples across a range of markets. If commodity prices decline, then the Real is likely to weaken, while if prices rise, the Real strengthens.
Inflation is also a critical driver of the Real, with higher-than-expected inflation typically leading to the currency strengthening. At present, the Brazilian government is aiming towards inflation targeting with a range of 3.75%-5.75%.
The Brazilian interest rate, which stands at 2.50%, is currently at a historic low. This has caused a disadvantage for investors in the country, and as such, there has been a decline in foreign funds. This situation, therefore, creates an economic incentive for importing funds into Brazil, which in turn can help to strengthen the Real.
Brazilian Banks and the USD/BRL
Brazilian banks typically operate in USD because it is easier to acquire liquidity and lower interest rates. However, a weak Real can cause banks to lose money due to the currency fluctuations. This has caused proactive measures from some of the Brazilian banks to offset potential losses through currency hedges.
Some Brazilian banks are already offering solutions to help protect themselves against currency fluctuations. This has occurred through the provision of currency swaps to their clients, securing their income streams while also mitigating market changes.
Brazilian banks are also looking to hedge their own positions by buying USD positions in anticipation of potential weakening of the Real. This proactive approach will help them construct a safer position as USD/BRL currency risks persist.
Conclusion
Economists at Société Générale are predicting a gradual upward trajectory for the USD/BRL currency pair, but it is important to monitor the support level closely to determine whether the pair is in danger of an extended move down. Factors such as commodity prices, inflation, and interest rates all influence the value of the Real, as will the political and economic climate in Brazil. Through hedging and currency swaps, Brazilian banks are seeking to protect themselves against the inherent risk of currency fluctuations, as they navigate the USD/BRL currency pair.
