BRL's Downside Break Signals More Aggressive Weakness Ahead


Following choppy sideways trading in recent weeks, the Brazilian real has depreciated significantly in the last few days , and we anticipate that a period of more aggressive weakness is on the cards in the coming months . After bouncing off of trendline resistance near BRL2.2 6 00/US$ , the unit pushed below support around the BRL2.3200 /US$ level , and its recent lows . We believe that this downside break i s a very bearish signal, and as previously indicated, will look to revisit our 2013 average and end-year forecasts of BRL2.1450/US$ and BRL2.3000/US$ , respectively in the coming weeks ( see 'Significant Headwinds To Weigh On Growth In 2013 And 2014', August 14 ) . This is underpinned by our view that a more significant leg lower for the unit may be on the cards , targeting a move towards key trendline support around BRL2.4500/US $ , a 4.0 % move .

Sustained Downside Break A Bearish Signal
Brazil - Exchange Rate, BRL/US$ & RSI And MACD (Daily)

Although local news sources report that the Banco Central do Brasil (BCB) plans to intervene more aggressively to strengthen the unit in the coming days, we believe that the real will remain in its downtrend, as similar efforts have done little to change the unit's trend in recent months ( see 'BRL Weakness Raises Red Flag Despite Intervention', August 9). Moreover, with analysts and investors likely to slash their growth forecasts after disappointing June retail sales and economic activity data released this week - we recently downgraded our own 2013 real GDP growth forecast to 2.0% from 2.6% - and poor balance of payments dynamics to persist in the coming months, we see little reason to like the real at present. In addition, while inflation moderated slightly to 6.3% year-on-year in July, coming back within the central bank's 4.5% ± 2.0% inflation tolerance band, we anticipate that it will remain elevated through year-end. Although continued monetary tightening, in line with our forecast for another 75 basis points of rate hikes to 9.25% this year, is likely to bolster the bank's inflation-fighting credentials, we do not anticipate that this will prompt a significant change in investor sentiment. These factors, combined with the unit's break below key support, mean that we believe more aggressive real weakness is on the cards in the coming months, targeting a move towards BRL2.4500/US$.

Next Stop Trendline Support?
Brazil - Exchange Rate, BRL/US$ (Weekly)
This article is tagged to:
Sector: Country Risk
Geography: Brazil, Brazil, Brazil, Brazil

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