BRL likely to recover if market expectations of interest rate cuts also fall, says Commerzbank

The Brazilian real is expected to recover somewhat if market expectations of interest rate cuts also fall, according to the latest research report from Commerzbank.

At 0.4 percent q/q, GDP for the 2nd quarter was published slightly better than expected. At its last meeting at the end of July, it had at least left the door open for this.

However, it had stressed that its decision depended on data developments. Of course, 0.4% growth is not particularly intoxicating. But it is still better than negative growth, which would have meant a technical recession.

Against the backdrop of recent interventions in the foreign exchange market, we are sceptical about further rate cuts anyway since such a move would put the BRL under depreciation pressure which seems to be exactly what the central bank does not want.

In any case, the market is asking itself why the central bank intervened directly in the market for the first time in more than 10 years, instead of intervening in the swap market as it has always done. An interest rate cut would probably increase the confusion and could send the BRL further down the drain. The strong depreciation of the BRL in recent weeks was well justified, the report added.

The trade conflict between China and the USA, the crisis in Argentina and, most recently, the fires in the Amazon, which have provoked strong international criticism: The outlook for Brazil's economy remains gloomy.

"The surprising interest rate cut by the central bank at the end of July by 50 bp is likely to have further fuelled the downward trend in the BRL. Against this backdrop, we believe that the central bank will not be able to lower its key interest rate again," Commerzbank further commented in the report.