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BRAZIL: Goldman Sachs Sees BRL Among Better EMFX Performers Longer-term

BRAZIL
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  • When comparing EM FX performance in October to other market developments, Goldman Sachs finds the Real to be one of the main underperformers. However, most of this underperformance is concentrated in the last week. Before that, Real depreciation was largely consistent with higher US yields, lower commodity prices and an increase in country-specific risk.
  • On the latter, the lack of clarity on timing of potential spending cuts in a context of low fiscal credibility is likely weighing on market sentiment. Meanwhile, investor focus is squarely on the US election this week, although a 50bp hike by the BCB on Wednesday could help push back against fears of fiscal dominance, especially if the level of real rates is pushed significantly higher than average.
  • Over the near term, global factors are likely to dominate, although ultimately, in a world where the status quo on US policy is maintained, Chinese stimulus has positive spillovers, there is some fiscal tightening in Brazil and the BCB continues to push real rates higher, the Real should be among the better performers in EM FX. For now, risks remain elevated and in a Republican sweep scenario GS would expect to see further BRL weakening. The degree of MTD BRL underperformance is still small compared to the period after the 2016 US election.
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  • When comparing EM FX performance in October to other market developments, Goldman Sachs finds the Real to be one of the main underperformers. However, most of this underperformance is concentrated in the last week. Before that, Real depreciation was largely consistent with higher US yields, lower commodity prices and an increase in country-specific risk.
  • On the latter, the lack of clarity on timing of potential spending cuts in a context of low fiscal credibility is likely weighing on market sentiment. Meanwhile, investor focus is squarely on the US election this week, although a 50bp hike by the BCB on Wednesday could help push back against fears of fiscal dominance, especially if the level of real rates is pushed significantly higher than average.
  • Over the near term, global factors are likely to dominate, although ultimately, in a world where the status quo on US policy is maintained, Chinese stimulus has positive spillovers, there is some fiscal tightening in Brazil and the BCB continues to push real rates higher, the Real should be among the better performers in EM FX. For now, risks remain elevated and in a Republican sweep scenario GS would expect to see further BRL weakening. The degree of MTD BRL underperformance is still small compared to the period after the 2016 US election.