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BRAZIL: Goldman Sachs Recommend Short EUR/BRL

BRAZIL
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  • Goldman Sachs believe the hawkish BCB stance, if followed through under new Governor Galipolo, should help stabilize the currency and support total returns through carry. However, there is only so much the central bank can do to offset fears of ‘fiscal dominance’ in the currency, and a credible fiscal anchor remains imperative to unlock the BRL’s value in their view.
  • Still the BCB’s actions (including interventions) should guard against a sustained move higher in USD/BRL from current levels as long as the fiscal headlines do not deteriorate further.
  • With this in mind, GS initiate a new trade recommendation to go short EUR/BRL for a total return target of 106 and a stop of 96, with Euro funding leading to higher carry (12-month carry close to 10%) and carry-to-vol.
  • The main risk to this trade is a renewed pick-up in fiscal noise that leads market participants to press further the ‘fiscal dominance’ scenario. Here, CDS longs screen as a relatively cheap hedge for that outcome, according to Goldman Sachs.
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  • Goldman Sachs believe the hawkish BCB stance, if followed through under new Governor Galipolo, should help stabilize the currency and support total returns through carry. However, there is only so much the central bank can do to offset fears of ‘fiscal dominance’ in the currency, and a credible fiscal anchor remains imperative to unlock the BRL’s value in their view.
  • Still the BCB’s actions (including interventions) should guard against a sustained move higher in USD/BRL from current levels as long as the fiscal headlines do not deteriorate further.
  • With this in mind, GS initiate a new trade recommendation to go short EUR/BRL for a total return target of 106 and a stop of 96, with Euro funding leading to higher carry (12-month carry close to 10%) and carry-to-vol.
  • The main risk to this trade is a renewed pick-up in fiscal noise that leads market participants to press further the ‘fiscal dominance’ scenario. Here, CDS longs screen as a relatively cheap hedge for that outcome, according to Goldman Sachs.