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USDBRL Extends Gains, Front-End DI Swap Rates Fall

BRAZIL
  • The slightly dovish-to-expectations 50bp cut from the BCB overnight has weighed on the Brazilian real from the open, with higher US yields and the associated negative sentiment across emerging market currencies exacerbating the move higher for USDBRL.
  • Short-term gains had previously been considered technically corrective, however, the most recent break of key resistance at 4.8452, the 50-day EMA, is a negative development for the Real. Price action has seen the pair narrow the gap with the previously pivotal level of 4.8936 and above here, the 5.00 handle will likely be psychologically significant.
  • The DI swaps curve has steepened, with the dovish surprise bolstering the rally in the front-end (Jan 25 DI’s have declined 24bps), however moves in the long-end more reflective of the upward pressure seen on US yields.
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