Recent analysis has shown the USD-BRL pair at the 3.8 level throughout the rest of the year. The loss of value in BRL has been attributed to the uncertainty flooding the market following the presidential elections held recently.
Unlike other countries in financial turmoil, it would seem that Brazil has a solid plan in place that will look to strengthen domestic demand, normalise food prices and other efforts will help increase inflation and interest upwards in the future. The estimates being made are as follows:
- Inflation to 4.9% in 2019, above the 4.25% target.
- Interest rates adjusted from 6.5% to 10% throughout 2019.
Experts also predict that the next government will be taken some robust measures to ensure that there is less fiscal vulnerability moving forwards, although a proposed social security reform seems unlikely.
It should be noted that some of these reforms will be relying on increased productivity.
Jair Bolsonaro Could Influence the Market Positivity
Given that Bolsonaro is keen to induce a sense of freedom, it should come as no surprise that this approach is welcomed as opposed to one that could spell doom and gloom for the economy.
The far-right President was recently elected following his campaign which promised to crush corruption and crime. He also made comments that the country going backwards is not an option.
Bolsanro was also contacted by other leaders including US President Donald Trump, and far-right interior minister Matteo Salvini.
Changes for the better will depend on what approach is taken in relation to the pension reforms and Brazil’s fiscal development.
Despite Best Efforts, Volatility May Return
Over the last few weeks, the exchange rate appreciated from 4.14 to 3.7. This could be due to the positive atmosphere created following the elections by the markets.
However, this appreciation is destined to be short-lived by experts once the election has taken place. This is because the economic policy for Brazil will be unveiled and will give the market a better idea of where BRL currently stands in relation to the new policy.
The combination of a newly-appointed President combined with a solid fiscal plan could see gains for BRL, but as actions speak louder than words, the value will only occur should these changes take effect.
As ever there are still other forces at play in relation to currency, so there’s never an unhedged prediction when investing. Over the next few months, a trader in BRL could see some healthy returns, but its important assumption is never part of the investment strategy.
