USD/BRL likely to trade at around 3.35 by end-2017

The USD/BRL pair rose modestly in the past month given political uncertainty. In recent weeks, worries have increased that proposed pension legislation in Brazil might struggle in Congress. Other factors, such as lower commodity prices and the prospect of additional loosening from the Brazilian central bank also led the Brazilian currency on the back foot.

Still, the recent high of 3.21 shows just a modest retracement from last November’s level of 3.50. These can be viewed as solid reasons to expect additional retracement, noted Lloyds Bank in a research report. Proposed pension reforms are being highly unpopular. Meanwhile, longer-term, most fundamental valuation metrics imply that the Brazilian real is overvalued.

“We forecast USD/BRL to end the year at 3.35”, added Lloyds Bank.