Brazil real to keep close to pre-pandemic levels despite the feeble economy

The Brazilian currency notched its best quarter in 13 years in the first three months of 2022, with a 17.5% appreciation

Photo: REUTERS/Bruno Domingos

Brazil‘s real will keep trading close to its pre-pandemic levels in coming weeks, still riding a wave of positive sentiment that is strikingly at odds with worsening economic conditions in the South American country, a Reuters poll showed.

The Brazilian currency notched its best quarter in 13 years in the first three months of 2022, with a 17.5% appreciation. It began the second quarter strongly and is set to maintain the winning streak in the near term.

However, the real’s performance is diverging from an economy that continues to disappoint. A sharp rise in interest rates is denting economic activity but failing to significantly curb high inflation.

READ ALSO: For the first time in 12 months, Latin American startups have not raised $1 billion

Out of a total of 10 analysts that answered a separate qualitative question in the poll, six viewed the risks for the real skewed to the upside, while three saw them tilted to the downside and one was neutral – the most bullish balance in recent surveys.

Numeric forecasts were more cautious, but relatively optimistic as well, pointing to a shallow 1.3% drop in one month to BRL 4.72 per U.S. dollar from BRL 4.66 on Wednesday, according to the median estimate of 21 FX strategists polled April 4-6.

The poll shows the Brazilian currency is now expected to depreciate 10.8% to BRL 5.22 in 12 months, as Brazil‘s anemic growth, fears about the outcome of elections in October and other issues eventually offset the momentum.

READ ALSO: Foreign companies attract Latin American devs with working from home jobs and wages in dollars or euros

Just before the onset of the coronavirus pandemic, the currency changed hands at around BRL 4.20 to the dollar.

“The level of interest rates and the positive tailwind of commodities, amid a significant country risk premia reduction vis-a-vis last year, explains the move in BRL,” J.P. Morgan analysts wrote in a recent report.

They upgraded their second-quarter estimate for the real to 5.00 from 5.30 but added: “while we think the real can continue to be well supported around current levels, our valuation models have started to flag it on expensive territory.”

The Mexican peso, which traded at 20.034 per U.S. dollar on Wednesday, is expected to keep oscillating within its post-pandemic range of 20.00-21.00, slowly losing 2.7% in the next year to 20.60.

The Mexican currency has been trading steady since it returned to pre-pandemic levels shortly after the initial hit from the health crisis. In the first quarter of this year, it gained 3.2%, almost unmoved by the impact of Russia’s invasion of Ukraine.

Get the best insights about Latin America market in your inbox