Market Overview

The Brazilian currency, Real, was seen to be mostly uncertain about its trading this year as it was moving within a wide range from 5.60 at the beginning of 2022 to 4.60 in April.. But since June the Real has been trading steadily against the U.S. Dollar in a narrow range of 5.02-5.51 that has become even more narrower to reach 5.16-5.28 at the end of November. The major point here is that the Real is successfully challenging the U.S. Dollar amid wide fluctuations of the Greenback against other reserve currencies.

The Brazilian currency is strengthening amid hopes of less hawkish monetary tightening by the Federal Reserve (Fed) and is probably the reason behind the USD/BRL declining to 5.21 from 5.28 a few days ago. Nonetheless, the pair is moving inside this designated range even despite the decision of the Central Bank of Brazil to leave its interest rates unchanged at 13.75% during its meeting on December 8. Some pressure may be felt by the Brazilian currency after the publication of the retails sales in Brazil in October that are expected to decline to 2.3% year-on-year vs 3.2% year-on-year a month ago.

The Central Bank of Brazil is moving ahead of the Fed in that it has been raising interest rates from 2% since March 2021 after lowering in 2020-2021. The pace at which interest rates are being hiked in Brazil is much faster than in the U.S. This seems to be one of the major reasons to keep the Real steady despite huge differences between the two economies. The Brazilian government bonds are very attractive with 12.8% yield for 10-year securities, while U.S. Treasury notes with the same maturity have only 3.5% yield. Moreover, inflation in Brazil is at 6.5% year-on-year, which secures real income for bondholders. The resent numbers for U.S. inflation came out at 7.7%. Brazil also has 3.6% of GDP growth year-on-year vs 2.9% in America. The U.S. is in a better position when it comes to unemployment compared to Brazil as  unemployment currently stands at 3.7% in the U.S. compared to 8.3% in Brazil.

So, the Brazilian Real seems to be an attractive currency with a strong developing economy. With this combination of interest rates and inflation, the Central Bank of Brazil is unlikely to raise the rates further in the near future, while the Fed is expected to do so in order to tame inflation. With this in mind, the Dollar may be strengthening to the Real over the coming month. The move of USD/BRL towards the ceiling of the 5.5 may be expected.

Disclaimer:

Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.