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TD Securities Enter Short EURBRL, Targeting 5.26

BRAZIL
  • TD Securities note that the carry trade continues to outperform in a backdrop of suppressed FX volatility. They have upgraded LatAm currencies with strong carry and an improving growth backdrop (BRL, MXN, COP), believing that there is no catalyst other than US elections later in the year to bring back FX vol. They also think that inflation will continue to move lower, giving central banks space to start cutting rates.
  • Given this backdrop, they have added a short EURBRL trade, entering at 5.4667 and targeting 5.26 with a stop loss of 5.58.
  • The BRL is very sensitive to global growth, risk sentiment and commodities and they like funding long BRL in EUR especially, considering the diverging growth and carry story. Moreover, the BCB might not be able to ease policy as much as markets expect, underscoring expansionary fiscal policies and elevated inflation expectations.
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