Technicals Highlight Risks Of Significant BRL Weakness
While we maintain a firmly negative stance on the Brazilian real over a multi-quarter time horizon, the prospect of significant intervention by the Banco Central do Brasil (BCB) has kept us from taking an outright bearish stance on the unit in the near term. However, poor technicals and the unit's break through the BRL2.350/US$ level, a recent low, has caused us to question some of our core assumptions for the real in the next few months. Indeed, while we previously suggested that the unit would trade sideways-to-weaker in the near term, the real has depreciated more aggressively than we expected over the past few days (see 'BRL: Major Downside Limited For Now', November 27).
Sentiment towards the unit has likely turned more negative following a relatively weak Q313 real GDP growth print released on December 3, which indicated that the economy grew by 2.2% year-on-year (y-o-y) between July and September, and contracted by 0.5% in quarter-on-quarter terms, as well as still-weak trade and fiscal data. Moreover, with global financial markets beginning to look set for a period of 'risk-off', we believe further downside could be ahead for the real in the next few weeks, towards the unit's recent low of BRL2.455/US$.
At that point, however, we believe we would see more aggressive intervention by the BCB to stabilise the unit, as was the case in August when the bank announced its US$60bn FX swap auction programme. This is underpinned by our view that significant currency weakness would undermine the BCB's inflation-fighting efforts, and potentially forestall a shift in the bank's agenda towards stimulating growth. Indeed, given our forecasts for real GDP growth to come in at 2.0% in 2013 and 2.5% in 2014, we believe that the BCB would prefer not to prolong the current tightening cycle, which has seen the monetary authorities raise the benchmark Selic target rate by 275bps to 10.00% this year in order to rein in headline inflation and inflation expectations (see 'Rates To Head Higher Through Early 2014', November 6). As such, we forecast a relatively moderate path for the exchange rate over the coming months, with the unit to average BRL2.300/US$ in 2014, but still notably weaker than our forecast of BRL2.160/US$ in 2013 (see 'BRL: Fundamentals Point To Further Downside', October 4).
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