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Following its last rate meeting the Brazilian central bank did not give the impression that it was going to cut interest rates further. In March it had cut its key rate by 50bp to 3.75% and had said in its statement that it considered that level to be appropriate. While it was still difficult to tell at the time what effect the corona pandemic was going to have on the economy we can now say with much clarity that the economic downturn will be pronounced.
As a result, the economists polled by the central bank on a weekly basis have lowered their economic forecasts in the past weeks and are now expecting a fall in GDP by 3% for this year, after last week's forecast of -2%. It is therefore hardly surprising that speculation is on the up as to whether the central bank might cut its key rate again at its meeting on 6th May.
Moreover a decision is due to be taken by the Brazilian Congress as to whether the central bank will be allowed to implement asset purchases in the future. The possibility that the Brazilian central bank could implement measures of quantitative easing might put additional pressure on BRL over the coming weeks.
Regarding positioning, after having initially increased short BRL positions, international investors’ materially unwound those shorts and their long USDBRL positions are now at the lowest levels in two years. BM&F data shows BRL shorts at BRL 22bn, having declined from a peak of BRL 36bn a few weeks ago. Even though this could be a sign of stabilization in the currency, as volatility persists we believe that foreign accounts will continue to swing greatly.
BCB has been one of the central banks intervening the most in the FX market, although this has not changed the directionality of the currency materially or even reduced volatility meaningfully. The Central Bank has sold approximately USD 10bn of FX swaps, while it even had to step up with spot sales during the most difficult days for risk assets in March.
On the other hand, we do not foresee much more scope to the upside in USDBRL following the clear uptrend since the start of the year. Instead market participants are likely to increasingly take a wait and see approach. We recommend a 1x2 USDp/BRLc structure (4m, K = 4.80/5.40), spot reference: 5.3164 levels. Courtesy: JPM
