As the USD/BRL pair continues to fluctuate, ING’s FX strategist Chris Turner points out that the Brazilian real has seen a significant decrease from its peak of 5.80 in early August. The global equity market recovery and weakening dollar have contributed to this decline, but concerns remain about Brazil’s terms of trade.
The recent drop in Brazil’s terms of trade, driven by weak Chinese demand for key exports like soybeans and iron ore, suggests that the real may struggle to maintain its strength. Turner notes that current levels indicate a trading range of 5.70/5.80 for USD/BRL.
Investors are also keeping a close eye on the Brazilian government’s upcoming budget plans for 2025, set to be announced on August 31st. The market is divided on whether the Lula administration will prioritize social spending, potentially missing fiscal targets and weakening the real, or if spending cuts will be made to appease bond markets. Historically, fiscal weaknesses have posed challenges for Brazilian asset markets.
With the budget announcement and terms of trade drop looming, Turner predicts that USD/BRL will struggle to break below the 5.40/45 support level in the near future.
Analysis:
The fluctuations in the USD/BRL pair are influenced by a combination of global market trends, commodity prices, and government policies. Investors should monitor Brazil’s terms of trade, budget announcements, and fiscal decisions to assess the potential impact on the real’s value. Understanding these factors can help individuals make informed decisions about their investments and financial strategies in relation to the Brazilian currency.