USD/BRL KEY POINTS:
- The market has started to price a more aggressive tightening cycle in Brazil following BCB’s hawkish guidance yesterday
- Front-loaded rate hikes by the central bank will elevate the Brazilian real carry, supporting the currency over the medium-term
- In this article we present the most important technical levels for USD/BRL to consider in the upcoming days
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USD/BRL gained on Thursday, rising 0.8% to 5.2145 on Brazil’s fiscal uncertainty. Investors fear that President Jair Bolsonaro may push policymakers to boost social spending under the “Bolsa Familia” program to improve his standing ahead of next year’s presidential election. Increased public spending may put pressure on the budget and raise the debt burden at a time of declining tax revenues. As a result of these concerns, traders trimmed exposure to the real, ignoring the Banco do Brasil Copom’s decision to tighten monetary policy Wednesday evening.
BCB raised borrowing costs by 100 bps to 5.25% yesterday, pledged another hike of the same magnitude at its September meeting and indicated that the Selic benchmark rate will have to go above the so-called neutral level during this cycle to anchor inflation expectations.
The ultra-hawkish forward guidance embraced by the central bank has led markets to price in more aggressive tightening, with 235 basis points of additional hikes expected over the remainder of the year as of this morning. In the medium term, the wide monetary policy divergence between the BCB and the Fed should keep USD/BRL on the defensive and push it towards its annual lows.
Shorter term, however, we shouldn’t rule out price action noise and even temporary spikes in USD/BRL on Brazil’s fiscal woes and FOMC taper speculation. On the latter point, it is important for traders to keep an eye on what the Fed says about monetary policy tightening in the coming weeks, as any sign of imminent stimulus reduction could propel US Treasury yields higher and weigh on emerging market currencies.
USD/BRL TECHNICAL ANALYSIS
Earlier this week, USD/BRL tried to push higher, but was stopped by channel/Fibonacci resistance at 5.2700. From that level, bears wrestled control of trade, pushing the pair towards 5.1600, although selling pressure appears to be waning at the time of this writing. To rejuvenate downside impetus, price would need to drop decisively below key support near the 5.0000 psychological mark. If this scenario materializes, there would scope for a move towards the 2021 low in the 4.8950 area.
On the other hand, if buyers reassert upside momentum over the next few days, the first resistance comes at 5.2700, a level discussed before. A clear break here may see the next ceiling at 5.3500, where the 200-day simple moving average converges with a 5-month descending trendline extended from the March high.
USD/BRL TECHNICAL CHART
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—Written by Diego Colman, DailyFX Market Strategist