Brazil: Chronic disappointment – ABN Amro

Coronavirus will impact Brazil as well though a slight acceleration in growth is expected in 20/21. BRL is expected to remain weak as an emergency rate cut could increase downward pressure on BRL, according to economists at ABN Amro. USD/BRL trades at 4.664.

key quotes

Brazil’s very slow recovery has kept inflation subdued in recent years and below the central inflation target for most of the second half of 2019. This, together with a strong external position, has created scope to push ahead with further interest rate cuts. 

“Most analysts now expect another 25 bp so-called ‘emergency’ rate cut in Brazil as well. We think this might be a risky move.” 

“The impact of a further rate cut on economic growth is probably limited, while there is a clear risk that this will lead to a further weakening of the currency, which is already under pressure due to increased risk aversion.

“While inflation remains low in Brazil, it did jump from 3.3% yoy in December 2019 to 4.3% in January 2020 and 4.2% in February. While this is still around the central inflation target for 2019 of 4.25%, it means that real interest rates are now close to zero.” 

“Emerging market currencies, including the real, will probably decline given that weaker global growth and the risk-off environment are negative for these currencies. We expect the real to remain weak in Q1 and Q2, while FX interventions will likely dampen the weakness. 

“Our new USD/BRL forecasts are 4.75 for Q1 and Q2, 4.6 for Q3 and 4.5 for Q4.”