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Goldman Sachs Expect BRL Broader Risk Beta To Remain In Driver’s Seat

BRAZIL
  • According to Goldman Sachs, developments on the fiscal outlook have been an important idiosyncratic driver for BRL. President Lula stated that the government does not need to have a primary fiscal balance of 0% in 2024, which is one of the targets of the new fiscal framework. This led to a sharp repricing higher of Brazilian rates and the currency to initially underperform.
  • Fiscal balances have already been deteriorating YTD and expectations for 2024 are for a 0.75% primary deficit according the BCB’s weekly survey of market analysts. While a small deficit is not a game-changer, there is a lingering worry about the credibility and willingness of the government to cut spending to deliver on their targets and how this could impact the broader trajectory of fiscal policy.
  • This could lead to BRL underperformance in moments of increased focus on the fiscal trajectory but, outside of this, Goldman Sachs expect the Real’s broader risk beta to be in the driver’s seat (with the weakening from earlier in the week having now fully reversed in this ongoing bout of US rate relief).
  • Goldman Sachs like to position for tactical USD downside in LatAm high carry currencies which have a lower exposure to Chinese and European activity and also benefit from lower rate volatility.
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