Ibovespa Still 'Cheap' According To USDBRL

• Momentum on BRL has been strong since the start of the year, with USDBRL breaking below its key support at 5 this week to test a new local low at 4.9050 (lowest level since June 2021).
• The real has been trading significantly below its ‘fundamental’ value given the aggressive tightening cycle run by the CBB.
• The CBB has raised its policy rate by nearly 10% in the past year (9.75%) to 11.75% to ease inflationary pressures, with another 100bps priced in for the next meeting on May 4^th.
• Support for BRL could continue in the short term as market continues to ‘deleverage its geopolitical hedges’.
• ST support on USDBRL stands at 4.8930 (June 25 2021 low); a break below that level would open the door for a move down to 4.8190.
• Interestingly, equities have been recovering in recent weeks, but still remain ‘cheap’ given the USDBRL level.
• The chart below shows that the Ibovespa index was trading above 13,000 in mid-2021 (i.e. 10% higher) when USDBRL was trading below 5.
• Ibovespa is up nearly 10% in the past week and broke above its 200DMA resistance this week (rejected a few times since the start of the year).
• The main risk for equities remains how fast the deceleration in the economic activity will be.
  • We previously saw that the aggressive tightening cycles run by EM central banks (CEEMA/Latam) have been pricing in a significant slowdown in the business cycle for 2022.

Source: Bloomberg/MNI