Brazilian real’s rally likely to halt in medium-term, says Danske Bank

Last week’s positive news about has rebounded confidence towards the Brazilian economy. President Michel Temer has escaped the fate of his predecessor Dilma Rousseff. The pressure coming from the corruption scandal surrounding Temer seems to have eased, giving him more space for economic reforms, one of which is important, noted Danske Bank.

Vanishing political noise has pushed the Brazilian real up 4 percent against the U.S. dollar in the last 30 days and improved confidence should see portfolio inflows return. Because of the abrupt relief in political risk, a near-term rally in the Brazilian real and accordingly make sharp revisions to short-term USD/BRL forecasts: 3.05 in one month and 3 in three-month horizon, stated Danske Bank. Yet, a stronger USD because of a more hawkish Fed is a clear upside risk for the short-term USD/BRL forecast.

As the current account continues to be in deficit and the central bank likely to cut rates by 200 basis points in the second half of 2017, the BRL rally is expected to come to a halt in the medium term, finding equilibrium in the long term at 3 in the six-month horizon and 2.90 in 12-month, added Danske Bank.

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