Goldman Sachs Re-initiate Long BRL/ZAR Recommendation

While uncertainty around Brazilian policy is important, and while they will closely watch incoming information around the cabinet that Lula assembles, two factors suggest to Goldman Sachs that today’s weaker open for the BRL is an opportunity to engage with BRL longs.

• Goldman note there have been encouraging signs that domestic volatility could be limited and also highlight the fact that Brazil is one of the few clearly positive macroeconomic stories in a relatively difficult EM landscape.
• They believe a fall in domestic uncertainty in Brazil in coming hours and days could result in significant upside for BRL.
• To reflect these factors, GS reinitiate their recommendation to be long BRL/ZAR, with an entry level of 100, linked to levels of BRL/ZAR at time of publication, a total return target of 108, and a stop of 96.
• Given the Real’s high ‘beta’ to global risk sentiment, in their view BRL longs are best expressed when paired against another risk-sensitive currency, especially one that features lower carry, lower exposure to a still-strong US activity growth picture, and higher exposure to activity and FX wobbles in Asia.