Brazilian real likely to remain vulnerable to profit-taking forces in months ahead

The Brazilian real has gradually gained from favorable external market conditions predominantly shaped by the ultra-low interest rate environment in Europe and the U.S., excess global liquidity eyeing undervalued emerging-market assets and a weak rebound in global commodity prices. Since mid-January, the real has appreciated 33 percent against the U.S. dollar and is expected to remain vulnerable to profit-taking forces in months ahead, stated Scotiabank in a research note.

Meanwhile, a sharp disconnect between the bullish tone suggested in financial market metrics and the bearish tone approved by international credit rating agencies on Brazil’s creditworthiness is worth stressing, said Scotiabank. The positive economic growth to resume next year, along with the current contraction of the current account deficit and progress on the structural fiscal adjustment warrants a cautious positive view in the year ahead for the nation’s sovereign credit, added Scotiabank.

But the improving tone could by slightly moderated by the potential market stress to be caused by normalization of monetary policy in the US. Currently, all credit agencies are keeping a “negative” outlook on the country’s long-term foreign currency sovereign debt ratings.