ING’s Chris Turner notes USD/BRL may move toward 5.14 as the stronger US Dollar and local political and trade risks weigh on the Brazilian Real (BRL). He argues BRL is catching up with domestic rate markets and expects dips to find support given Brazil’s high yields and energy exporter status.

Brazilian Real catches up with rates

"The stronger US rate/dollar environment is starting to prove a headwind for some of the more popular emerging market plays, including the Brazilian real carry trade."

"Beyond the strong dollar environment, the local story sees President Lula’s approval ratings continue to widen over Flavio Bolsonaro and Brazil having to deal with the renewed threat of 25% US tariffs."

"In reality, however, it looks as though the Brazilian real is catching up with the local interest rate market, where short-dated rates have been selling off since late last week."

"Barring a massive spike in US yields and the dollar, which is not our baseline scenario, we expect the BRL to find good support on any dips given its high yield and net energy exporter status. Maybe the correction to 5.14 will be sufficient."

"At the start of the year, the market had been pricing the BACEN’s policy rate down at 12.50% from a 15.00% starting point. Now investors are considering the next BACEN move (off a 14.50% policy rate) to be a hike."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)