USD/BRL to race higher toward 5.20 by year-end – MUFG

BRL appreciated to record level in one year, but it might not remain so strong in the medium run, according to economists at MUFG Bank.

Interest differential will continue to shrink

In the external environment, the hawkish speeches delivered by the Fed, ECB and BoE coupled with concerns on Chinese growth hit EM currencies. 

In the domestic market, the stronger signs that the Central Bank will start to ease monetary policy in August reinforced our expectation that the interest differential will continue to shrink and reduce the attractiveness of long BRL carry trades. In addition, we expect that the government will face difficulties to increase revenues to meet the fiscal goals, worsening the fiscal balance, and triggering a repricing of the initial positive market reaction to the likely approval of the new fiscal framework in July. 

We expect the BRL to weaken heading into year-end lifting USD/BRL up to 5.20.