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Trade Update: Go Short $/BRL On Better Macro Data And Hawkish Bacen

Fuseworks Media
Fuseworks Media

During the recent sell-off in cyclical assets, the BRL was among the hardest hit currencies globally. Last week alone, the trade weighted Real lost 3%. However, given the solid US data at the end of last week and global PMIs this morning, growth expectations priced into cyclical assets are now probably too pessimistic.

In early January, the BRL was trading at levels very expensive relative to fair value (GSDEER). As we have argued, cyclical factors justify a reasonable degree of overvaluation, but at $/BRL 1.70-172, the risk-reward for long BRL was poor. Since then, local markets have moved to price reduced growth views on Brazil. This was also visible in disappointing capital inflows into Brazil in January and the marked weakness in the BRL. BRL is trading 10% weaker than at the start of the year. Moreover, during the recent turmoil, Jan 12 CDI futures have declined by 18bps from the recent highs.

However, Brazil's growth has remained strong and is accelerating. BACEN has moved from a neutral bias towards a more data dependent stance, which in our view makes a tightening in April very likely. Together with cylical assets moving back to a more constructive view of the world, a more hawkish central bank stance could support a return of the BRL towards the lower end of the recent trading ranges. A pick-up in IPO flows could further boost the BRL.

We recommend short positions in $/BRL at 1.8870 with a target of 1.75 and a stop above 1.94

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