Goldman Sachs on BRL: Adjusting USDBRL Forecasts Higher

Goldman Sachs on BRL: Fiscal Volatility Takes Its Toll, Adjusts USDBRL Forecasts

• Among pro-cyclical EM FX, GS have been least constructive on BRL; their preferred candidates remain RUB overall and MXN in the Latam region, where they have outstanding trade recommendations.
• While the carry rebuild in BRL is impressive, they have argued that its high cyclical beta should be less of a tailwind in a more restrained recovery, and volatility is likely to increase as we head into an election year.
• In the past week, where a range of EM and G10 cyclical currencies have strengthened versus the Dollar, BRL has depreciated markedly on the spending cap breach news, from an already heavily indebted starting point
• Accordingly, GS are again moving our forecasts for BRL weaker, with USDBRL now 5.40, 5.50 and 5.50 in 3, 6 and 12 months (relative to 5.10, 5.00 and 4.95 previously).
• There is of course plenty of scope for bouts of strength in the next few months– after all BRL does embed an attractive combination of deep value and rising carry, and the central bank is likely to respond after the sharp selloff in recent sessions—but overshoots to the weak side are also possible if the fiscal and governance situation deteriorates further; and overall, it already feels like fiscal volatility ahead of the election uncertainty has become a more important driver of the Real relative to its global cyclical betas and monetary policy.