Brazil: Negative outlook for BRL short and medium term - Danske Bank

Analysts from Danske Bank, turned negative on the Brazilian Real in the short and medium term and they point out that negative risks continue to be domestic. They expect the presidential election to add to BRL volatility. 

Key Quotes: 

“Brazil’s economy continued to expand accelerating to 2.1% y/y in Q4 17, from 1.4% y/y growth in Q3 17 (...) We raise our 2018 GDP growth forecast to 2.2% y/y, up from 2.0% y/y previously, expecting 2019 GDP to expand 2.4% y/y, as monetary easing provides room for investment growth.”

“The major sentiment driver remains political turbulence ahead of the presidential election. There has been a lot of speculation about who might run in the election. All this, together with the struggle to see pension reform passed, has been affecting the BRL and the markets.”

“We expect monetary easing to slow down in H1 18, stopping in H2 18. We believe inflation is set to climb marginally from the current low, still providing support for private consumers and justifying upcoming rate cuts.”

“Political turbulence has been driving the BRL over the past few months. Additional pressure on the currency is coming from the deteriorating current account balance and BCB’s excessive hawkishness could reduce carry attractiveness. Long-term prospects for the BRL look brisker on an economic recovery and still attractive carry, while we believe pre-election woes are set to weigh further on the currency in 2018.”

“While our BRL forecast has been more bullish than market expectations, we turn BRL negative in the short and medium term. The most important negative risks continue to be domestic and we expect the presidential election to add to BRL volatility. Upside risks include a stronger recovery of the Brazilian economy and rapid approval of reforms by the government, stabilising the political situation ahead of the presidential election.”