USD/BRL: Here’s why the Brazilian real has staged a comeback

The Brazilian real continued its remarkable comeback on Thursday as investors remain optimistic about the country’s economy. The USD/BRL exchange rate plunged to a low of 4.80, the lowest level since June 8th of last year. It has crashed by over 12% from the highest level in 2022. 

Brazilian real strength continues

Many emerging and frontier market currencies have tumbled this year. We have covered the collapse of currencies like the Pakistani rupee, Nigerian naira, South African rand, Turkish lira, and Zimbabwe dollar among others.

Two of the best-performing emerging market currencies in the past few months are the Brazilian real and the Mexican peso, which I wrote about here.

The Brazilian real has done well as investors cheer the ongoing reforms by the Lula administration. In a report on Wednesday, S&p Global raised its outlook to positive from stable. The ratings agency cited the ongoing clarity about the country’s fiscal and monetary policy.

Analysts and the government believe that the country’s economy will do well in the second half of the year. This growth has been helped by the strong demand for its key commodities like soybeans, corn, wheat, and oil. The export boom led to strong trade surpluses earlier this year.

The economy expanded by 1.9% in the first quarter of the year after it contracted by 0.2% in the same period in 2022. This increase was better than the median estimate of 1.3%.

Still, there are signs that this growth is moderating. Data published this week showed that Brazil’s retail sales dropped to 0.1% in April, lower than the median etimate of 0.3%. Sales rose by just 0.5% on a year-on-year basis.

The USD/BRL price also dropped as investors reacted to the latest Federal Reserve decision, which we wrote about here.

USD/BRL technical analysis

The daily chart shows that the USD to BRL exchange rate has been in a strong bearish trend in the past few months. It managed to move below the important support level at 4.88, the lowest point on April 14th and May 16th. The USDBRL pair has moved below the 25-day and 50-day moving averages.

At the same time, the Relative Strength Index (RSI) is approaching the oversold level of 30. Similarly, the Stochastic Oscillator has moved to the oversold level. Therefore, the pair will likely continue falling as sellers target the next support level at 4.5926.