Brazil: upside prospects for BRL, but only for half year - Danske Bank

According to analysts from Danske Bank there are sings that the recession in Brazil is abating. They see prospects of further strengthening in the BRL near-term. 

Key Quotes: 

“There are tentative signs that the recession in the Brazilian economy is abating. Real GDP fell by 2.9% y/y in Q2 (slightly better than consensus) versus a fall of 3.8% y/y in Q1 (…) While we maintain our real GDP growth forecast of -3.5% for 2016, we lower our forecast for 2017 to 0.5%, significantly below consensus of 1.0%.”

“New central bank governor Ilan Goldfajn, who was sworn in as Brazil’s central bank president in June, has come across as a hawk. Amid falling inflation and government commitment to more prudent fiscal policy, the central bank (BCB) has lowered its leading Selic rate by a total of 50bp over the past two meetings. We think the easing cycle will continue, albeit at a slower and more cautious pace, amid increasing political risks. Hence, we think the central bank will lower the rate by a further 25bp in January.”

“The BRL weakened somewhat on the back of Trump’s victory in the US presidential elections but in recent weeks has recovered some ground. We see prospects of further strengthening near term on account of higher commodity prices, solid metal demand from China, improving external balances and a slightly undervalued BRL. However, from around mid-2017, we expect USD/BRL to face upward pressure from a slowdown in the Chinese economy and weakening commodity prices. As a result, our USD/BRL forecast is 3.3 in 3M, 3.4 in 6M and 3.6 in 12M.”