The USD/BRL exchange rate retreated and neared the important support at 6.00 on Friday as the Brazilian real rebound continued. It has dropped from the year-to-date high of 6.3100 in December when real’s plunge led to panic among traders and investors. So, will the USDBRL pair maintain its bearish trend or is it ripe for a rebound?
Brazil currency rebounds
The USD/BRL exchange rate dropped sharply as some investors bought the dip in Brazil’s currency following the recent worries about the budget.
This sell-off happened after President Lula’s budget cuts failed to excite investors, who believed that it fell short of expectations.
The real has rebounded as the market absorbed the substantial interventions by the central bank. It did that by selling billions of dollars and hinting that it would deliver more interest rate hikes, a move intended to make the real more attractive,
The central bank has pumped over $7 billion in the market in the past few months, and investors anticipate that more interventions may be needed.
These moves have also coincided with a period in which Brazi’s central bank has continued to hike interest rates. In the last meeting, it boosted them by 100 basis points, pushing them to 12.25% from last year’s low of 10.25%.
Brazil’s inflation has been in a slow uptrend in the past few months, moving from last year’s low of 3.69% to 4.87%. Inflation data to be released later on Friday will likely show that prices rose as companies adjusted for the currency depreciation.
The latest data shows that Brazil’s bond yields have remained steady in the past few months. The 10-year yield rose to 14.75%, lower than last year’s high of 15.50%. Similarly, the five-year yield has rallied to 15.30%, up from last year’s low of 10%.
Read more: USD/BRL: Here’s why the Brazilian real has imploded
US nonfarm payroll data
The next important catalyst for the USD/BRL pair will be the upcoming US jobs numbers, which will provide more information about the economic growth. Economists expect these numbers to show that the economy added over 164k jobs last month as the unemployment rate remained at 4.2%.
These numbers will come a few days after the Fed published the minutes of its last meeting. In them, officials expressed concern that inflation was not falling fast enough. As a result, they expect to maintain a fairly hawkish tone this year since rate cuts would exacerbate inflationary pressures.
The US will publish the next consumer inflation numbers on Tuesday next week. A sign that inflation is still high will validate the need for higher interest rates for longer.
The next key thing that may affect the USD/BRL is the upcoming trade relations between the US and other countries. On the positive side, the US has a big trade surplus with Brazil, making it a bit safe.
As a result, Brazil may benefit from tensions with China, which will help it boost market share in key industries like agriculture.
USD/BRL technical analysis
The daily chart shows that the USD/BRL pair has retreated in the past few weeks after it peaked at 6.31 in December. This retreat was in line with our Brazilian real forecast.
It has now dropped to 6.036, which is slightly above the 50-day moving average, a sign that the bull market is still going on. It has also found support at the ascending trendline that connects the lowest swings since October 7 last year.
Therefore, the Brazilian real crash will continue as long as it is above the 50-day moving average. If this happens, the next level to watch will be at 6.31, the highest swing last year.
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