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Goldman Sachs Revise USDBRL Forecasts Lower

BRAZIL
  • As long as the domestic backdrop remains supportive and interest in carry trades remains elevated, Goldman Sachs think the Real can continue to yield positive total returns in coming months. The pair still trades around 10% cheap to their estimated fair value of around 4.30, contrasting with the MXN’s expensiveness. Taking all these factors into account, they have revised their USD/BRL forecasts lower to 4.60, 4.40, 4.40 in 3-, 6- and 12-month (from 4.90, 4.85, 4.80 previously).
  • While the continued reach for quality EM carry has been a key driver of the Real’s performance amid the “discerning Dollar” backdrop of the last year, domestic developments have also contributed to the latest leg lower.
  • Firstly, on the inflation front, the May IPCA print surprised to the downside and pointed to visible progress on the stickier core and services components. This together with the FX strengthening and the decline in inflation expectations should be welcomed by the BCB at its meeting this week and set the stage for a policy pivot.
  • Given the elevated starting point for real rates and the continued progress on inflation, GS expect real rate differentials to remain FX supportive even as policy normalisation begins and think that fixed income inflows remain an important tailwind for the Real.
  • Separately, in an unexpected move, S&P revised Brazil’s external debt rating outlook from stable to positive earlier this week citing the “emerging framework for fiscal policy”. Given that it is unusual for rating changes to take place before a reform is finalised, we think it is likely there are other factors in the S&P’s rating model that are signalling a rating above BB- at the moment and are behind this outlook revision (namely the sharp decline in the headline inflation rate). As such, to the extent this decision reflects a broad-based improvement of macro fundamentals, it is also FX positive.
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