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BRAZIL: Goldman Sachs Mark-to-Market USDBRL Forecasts

BRAZIL
  • Goldman Sachs think domestic and external developments have had an equally important role in the BRL’s August recovery, notably the strong rebound for global sentiment and the BCB stepping up its hawkish rhetoric. GS feel that further Real appreciation may be a tougher climb from here and take this opportunity to mark-to-market their USDBRL forecasts to 5.35, 5.30, 5.20 in 3-, 6- and 12-months (from 5.10, 5.00, 4.90 previously).
  • While Goldman Sachs’ base case is still that rates will be unchanged,  BCB signalling has important implications for the currency and guards it from worsening inflation or fiscal news. Moreover, 12-month FX carry has now increased from around 3% in early April to over 5%. 
  • The role of domestic developments in the latest bout of BRL strength can also be seen through the lens of GS’ cyclical fair value model, where the negative contribution of the CDS residual component, which is a proxy for domestic risk premium, has abated. 
  • Still, despite the recent appreciation, around 6% of the BRL’s weakening since early April remains ‘unexplained’ by the models inputs and likely reflects domestic risk premium beyond what is captured by the CDS. 
  • Further BRL gains will require additional constructive developments on the fiscal front or a softer Dollar, both of which feel like a harder climb from here.
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