BRL: The premium is gone - Rabobank

Analysts at Rabobank suggest that their models seem to confirm the perception that the recent rally in BRL follows a reduction of risk premium in Brazilian assets, as financial markets take a sanguine view on the next administration’s willingness and ability to both maintain a credible economic policy and pass reforms in Congress.

Key Quotes

“Year-to-date, the BRL is still down about 11% vis-à-vis the USD, which is one of the worst performances among major currencies. However, our models suggest that about 90% of that depreciation stems from external drivers (e.g. higher U.S. rates), given the BRL’s high-beta pattern. This means that the recent “electoral/fiscal” idiosyncratic premium has fully eroded.”

“The depth, extension and sustainability of this rally in BRL (and other Brazilian assets) will naturally hinge on the perceived outlook and actual delivery of the key macro reforms. We see relevant execution risks ahead, so that we look for FX rate at 3.80 for end-2018 (with huge downside risks) and at 4.00 for end-2019 (with risks skewed to the upside).”