USD/BRL: Forecast to 5.50 by the third quarter – TD Securities

Analysts at TD Securities believe that the direction of risk for the Brazilian real is still to the downside, and likely dependent on an easing in the virus spread rate (and fears) in developed market economies.

Key Quotes: 

“We forecast that USDBRL will trade to 5.50 by the end of Q3, and look for it to stabilize around that level as the global economy recovers from the Covid-19 shock. We see BRL appreciation in Q1'21 to 5.35, 5.10 in Q2'21, 4.90 in Q3 and Q4'21 as easier monetary conditions globally (and in the U.S.) support an economic expansion post Covid-19 impact.”

“Currently the market is pricing in 50bps of easing for the March meeting, and essentially a bias for tightening by the end of Q3. If we look at inflation metrics we know that we'll see pass-through on the tradeable and likely regulated price components of inflation. Should the BCB care? Currently, inflation expectations are shockingly anchored, again still reflective of the output gap. Core inflation measures are anchored and below target. The interesting thing is that this includes substantial BRL depreciation through February, and though there may be a lagged effect, it is rather surprising and very suggestive we don't have greater expectational upside pressure and that we have very contained inflation diffusion.”