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Goldman Sachs on BRL: More Room To Run, But Falling Risk-Reward

BRAZIL
  • Over the near-term, if global risk premia continue their run of striking resilience to core rate moves and the Ukraine conflict, BRL’s high carry, broad commodity exposure, and sizeable ‘oil beta’ could continue to support further appreciation that would imply downside risks to Goldman’s 3-month USD/BRL forecasts.
  • Their combined GSDEER / GSFEER fair value estimates suggest a USD/BRL fair value of roughly 4.10, and their measures of LatAm FX risk premia suggest that BRL currently features a roughly 9% risk premium which, if entirely priced out, suggests a USD/BRL value of roughly 4.40; given these benchmarks, travel below 4.80 towards levels closer to 4.50 is certainly possible on a tactical basis.
  • Still, a number of factors keep GS more cautious about this possibility: first, with more FX strength in the rear-view mirror, less of a compelling argument for sizeable risk premium unwind, and with the Real sensitive to a potential drawdown in global risk sentiment, the risk-reward for Real longs looks less-attractive now than several weeks ago.
  • Second, with the Russia/Ukraine crisis further weakening Brazil’s growth outlook, the possibility of inflation converging to target in 2023 now more proximate, and with Brazil’s old-school fiscal challenges still very much in focus, the macroeconomic case for a strong currency over the medium run has weakened. This seems particularly true given both COPOM minutes and other recent comments from policymakers that suggest some risk that the final stage of Brazil’s hiking cycle could come in May, rather than our base case of COPOM hikes in both May and June.
  • Overall, Brazil’s combination of a maturing tightening cycle and challenging growth prospects suggest to GS that—while further near-term moves lower in USD/BRL are possible in the current environment—implementations on the rates side, such as their recommendation to stay long BRL DI Jan24s/Jan27s steepeners, may be more appropriate than BRL longs over the medium-run.
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