USD / BRL KEY POINTS:
- The market has begun to assess a more aggressive tightening cycle in Brazil, following yesterday’s BCB guidance
- Raising central bank interest rates forward will increase Brazil’s real capacity to support the currency in the medium term
- In this article, we introduce the most important technical levels USD/ BRL to consider in the coming days
USD / BRL rose on Thursday, rising 0.8% to 5.2145 due to Brazilian budget uncertainty. Investors fear that President Jair Bolsonaro could force policymakers to increase social spending under the Bolsa Familia program to improve their position ahead of next year’s presidential election. Increased public spending could put pressure on the budget and increase the debt burden at a time of declining tax revenues. Because of these concerns, traders reduced exposure to real, ignoring Decision of the Banco do Brasil Copom et tighten monetary policy Wednesday night.
BCB raised its borrowing costs by 100 basis points to 5.25% yesterday, At its September meeting, Selic promised another equivalent trip and noted that Selic benchmark the rate must rise nn neutral levels during this cycle et confirm inflation expectations.
The highly gambling guidelines adopted by the central bank have driven the markets a more aggressive price tightening, a further increase of 235 basis points is expected this morning for the rest of the year. In the medium term, large monetary policy gaps between the BCB and the Fed should keep the USD / BRL protected and bring it to its annual low.
In the short term, however, we should not rule out the noise of price fluctuations and even temporary jumps in USD / BRL due to Brazil’s budgetary problems and FOMC narrowing speculation. On the latter point, it is important for traders to monitor what the Fed is saying about tightening monetary policy in the coming weeks, as any signs of an imminent reduction in stimulus could move US Treasury yields are higher and this affects emerging market currencies.
USD / BRL TECHNICAL ANALYSIS
Earlier this week, the USD / BRL tried to rise higher, but the channel / Fibonacci hurdle stopped it at 5.2700. From that level onwards, the bears struggled to control the trade, pushing the pair to 5.1600, although sales pressures appear to be easing at the time of writing. To rejuvenate the negative impetus, the price should fall decisively below the psychological limit of 5,000,000 for key support. If this scenario materializes, it would be possible to move to the lowest point in 2021 in the 4.8950 region.
On the other hand, if buyers rise again in the coming days, the first resistance is 5.2700, which has been discussed earlier. A clear pause can be seen here at the next peak at 5.3500, where the 200-day simple moving average converges with a 5-month declining trend from the peak in March.
USD / BRL TECHNICAL TABLE
EDUCATIONAL INSTRUMENTS FOR TRADE
– Written by DailyFX market strategist Diego Colman