Big week for Brazil as announcements of strong 2023 suggest a weaker 2024 for BRL

December 21, 2023 08:39 AM PST | By Invezz

Big week for Brazil as announcements of strong 2023 suggest a weaker 2024 for BRL — Image source: Invezz

2023 inflation report

On December 21^st, the BCB (Banco Central de Brasil) released its latest inflation report. It showed a slight economic slowdown projected in 2024 after the country’s strong gains in 2023:

On the domestic front, the prospect of an economic activity slowdown was confirmed by the GDP growth of 0.1 percent in the third quarter of 2023, after a strong rise in the first half of the year. The value was slightly above the expected. The expansion in household consumption, especially of services and nondurable consumer goods, stands out. Conversely, investments have been dropping over the last four quarters. The trade balance is expected to achieve a record surplus in 2023, contributing to a moderate current account deficit. The GDP growth projections were slightly adjusted. For 2023, from 2.9 percent to 3.0 percent, and, for 2024, from 1.8 percent to 1.7 percent.”

Copom’s wait-and-see approach

Meeting minutes of Copom’s monetary policy meeting earlier this month, released this week, shed further light on Brazil’s stance:

“The committee believes that the international environment is less adverse than at the previous meeting… the probability of a soft landing in the United States has increased. Other countries have maintained their strategy of prolonged monetary policy tightening, which has been essential to contain global inflation. The Committee again focused on the sources and uncertainties for the future disinflationary process, contrasting the improvement in the current inflationary outlook with the challenges still ahead, such as the uncertain geopolitical context, the heated labour markets, and the tight output gap in several advanced economies. Given the recent volatility and uncertainty ahead on the international outlook, Copom maintained its assessment that it is appropriate to adopt a cautious stance, especially in emerging countries.”

FX: Recent BRL performance

The USD/BRL has been declining lately, after a fairly solid run earlier in the year with the Real frequently increasing against the Dollar. TheUSD/BRL pair broke through a key resistance to trade at more than 5.00 Real to the USD, only to decline below that point as of November 1^st. During November and early December, the USD/BRL has been on a bit of a losing streak, exacerbated by strong gains of the dollar amidst mounting hope of a soft landing for America as 2023 ends. The USD/BRL even broke below a key support level of 4.84 in recent days.

Meanwhile, the EUR/BRL has been largely range-bound for most of the second half of 2023, hovering between a 5.20 support and a 5.40 resistance level remarkably consistently.

Future prospects for Brazil in 2024

Meanwhile, popular Brazilian bank Itaú released a macro outlook for Brazil for next year entitled ‘between optimism and old challenges in 2024’. In it, it drastically revised a previous estimate of the BRL hovering at an average of 5.25 for 2024 down to an average of 4.90 to the USD.

We see room for a better performance of the currency given the improvement in the international environment, with the Fed expected to start cutting interest rates earlier in the year, which would partly mitigate the expected reduction in the interest rate differential and trigger depreciation of the USD at the global level. That said, we continue to expect an outperformance of the U.S. economy, which would limit the possibilities of a much weaker global USD or stronger BRL next year. Furthermore, low domestic risk premiums (considering the post-pandemic period) and a good trade performance (which should continue in the coming years) provide support for the currency. We forecast the exchange rate at 5.10 BRL/USD in 2025.”

The post Big week for Brazil as announcements of strong 2023 suggest a weaker 2024 for BRL appeared first on Invezz

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