USD-BRL moved back towards 3.50

Yesterday's BRL performance illustrates why things are likely to get an awful lot worse for the real before they get better. On the day when China deliberately weakened its currency (an action which implicitly points to an easing of monetary conditions further down the line), BRL was unable to rally. On the contrary, USD-BRL moved back towards 3.50. According to Commerzbank, this illustrates 1) investors have no interest in undertaking carry trades and 2) BRL will continue to suffer from idiosyncratic weaknesses, irrespective of whether external financing conditions improve. 

"It is difficult to make a constructive case for BRL at present and as a result, investors should use any dip to establish long USD-BRL positions. The Brazilian real will probably benefit only briefly from the welcome news that a major rating agency, while lowering the country's credit rating last night, also gave it a neutral outlook", says Commerzbank.