USD/BRL: Brazil real analysis as trade surplus surges to record

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Written on Jul 5, 2023

Reading time 3 minutes

The USD/BRL forex pair has been in a strong downward trend.
It is hovering near the lowest level since June last year.
The Brazilian government expects a record trade surplus this year.

The USD to Brazilian real (USD/BRL) exchange rate has been under pressure this year as investors reflected on the spectacular comeback of Brazil’s economy. It dropped to a low of 4.75 in June, the lowest point since June 2022. It was down by over 14% from its highest level this year.

Brazil economy is doing well

Brazil has slowly become one of the best-performing economies in the world even as the prices of key exports retreated. Its trade surplus has surged and the government sees it hitting a record high this year.

The commerce ministry said that it sees the country’s trade surplus jumping to over $84 billion this year. If this is correct, it will be 37.7% higher than where it was in 2022. This growth will happen as exports are expecting to jump to $330 billion while imports will fall to $272 billion.

Brazil is benefiting from the ongoing trends in the energy market, where oil prices have dropped recently. Further, the prices of fertilizer has also dropped, helping the country increase its agricultural yields.

Brazil's trade surplus in June 2023 reached a new all-time high. Important to note that this surplus isn't an outlier. The surplus in June 2021 was almost as big. Brazil is morphing into a trade and current account surplus country. The Real will be the anchor currency of LatAm… pic.twitter.com/7qV2t9V8K9

— Robin Brooks (@robin_j_brooks) July 3, 2023

Most importantly, Brazil has tightened its relationship with China, a key buyer of its agricultural commodities. China is buying more corn and soybeans as its tensions with the US continue. Its foreign trade is also benefiting from the ongoing crisis in Argentina.

The USD/BRL price retreated even as the Brazilian central bank decided to leave interest rates unchanged at 13.75% in its June meeting. It has remained in this level since August last year. Now, analysts believe that the bank will start cutting rates later this year since there are signs of an economic slowdown.

The next important USD to BRL news will be the latest Brazil and US services and composite PMI. It will also react to the Fed minutes and the upcoming US non-farm payrolls (NFP) data.

USD/BRL technical analysis

USD/BRL chart by TradingView

The USD to Brazilian real price formed a death cross in March this year as the 200-day and 50-day exponential moving averages (EMA) made a bearish crossover. Since then, the pair has continued falling and is now hovering near the lowest level since June last year.

The USD/BRL pair remains below the important support level at 5.01 and 4.88, the lowest level in August last year and May 16. It has also formed a brief pull back. Therefore, the pair will likely continue falling as sellers target the next key support at 4.5721 (2022 low).