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USDBRL Approaches 5.40, CIBC Believe DI Swap Rates Have Overreacted

BRAZIL
  • The Brazilian Real has come under renewed pressure at the open as domestic fiscal risks remain front and centre, and further MXN depreciation may also be weighing at the margin. USDBRL has closely matched the week’s high of 5.3888 ahead of the US data and markets will be closely monitoring 5.4286, the Jan 5 2023 high.
  • With local swap rates now pricing more than 60bps in rate hikes this year, CIBC think the market has overshot how cautious/hawkish the BCB will be over the next year, especially taking into consideration the last meeting split vote and the changes to the board next year (likely leaning more dovish).
  • Regarding the currency, CIBC recognise that the real’s high carry will remain a strong incentive to fade the upward move in USDBRL. However, CIBC would wait for a test of the 5.40-5.50 range before they assess this option.
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