USD/BRL Outlook

The Brazilian real is among the worst performing currencies against the US dollar in 2015. USD/BRL rose back towards 3.25 earlier this month, its highest level since spiralling to a 12- year low (3.3160) in March. The renewed weakness has coincided with further signs of economic malaise, with growth prospects deteriorating and inflation remaining stubbornly high. The economy is likely to have formally entered recession in the second quarter after contracting by 0.2% in the first. 

"We forecast a full year contraction of at least 1.5% this year, with deteriorating prospects for 2016," says Lloyds Bank.

Meanwhile, annual inflation accelerated to 8.9% in June, almost twice the government's 4.5% target. Facing such stagflation the central bank may struggle to raise interest rates at its next meeting on July 29 after hiking by 50bp to 13.75% in June. Meanwhile, the challenge facing the government to restore a primary fiscal surplus is also complicated by political infighting, threatening a sovereign credit rating downgrade. 

"We expect further BRL weakness against the USD in the year ahead," added Lloyds Bank.