The Brazilian Real has surged nearly 23% to 1.40 levels against the US dollar in 2016. The arrival of the new President Michel Temer, following the impeachment of Dilma Rousseff, has indeed created optimism among the investors. The limit over the increase in budget spending for the next 20 years was approved by Congress last week. Consumer confidence has increased for the fifth consecutive month and is at a five month high.
Likewise, business confidence has surged to the highest level since July 2014. Even the inflation has recorded a mild decline thereby allowing room for the Brazilian Central bank to cut the benchmark interest rate of 14.25%. However, we believe that the USDBRL will exhibit a trend reversal due to the reasons discussed below.
After contracting by 5.4% y-o-y in the first quarter, Brazil’s economy contracted 3.8% in the second quarter of 2016. For Brazil, the recession, which began in January 2015, is the longest since the 1930s. The Petrobras scandal, which broke out in 2014, took the country into recession. The sharp decline in the price of crude oil and the economic slowdown in China also fuelled the recession. Brazil is heavily dependent on China for the exports of petroleum products.
At the end of the second quarter, the unemployment rate in Brazil is 11.8%, up from 6.8% two years ago. Now, as much as 12 million people are unemployed in Brazil. The wages have declined 3% y-o-y in August.
After five months of improvements, industrial production declined 3.8% in August, compared to the previous year. This indicates that it would take several quarters for the economy to be brought back on the growth track.
Still, the Greenback declined against the Real mainly due to the uncertainty in the rate hike. Now it seems that the Fed has made up its mind to tighten the policy in December. Almost 70% of renowned economists anticipate a rate hike in December. Thus, we can expect speculators to build a long position in the US dollar. Based on the above facts, we forecast an uptrend in the USDBRL pair in the short-term future.
The USDBRL chart reveals monthly support at 3.1948. Minor resistance for the currency pair exists at 3.2220, while the major resistance is at 3.2520. The stochastic oscillator is emerging out of the bearish zone. So, we can anticipate an uptrend in the USDBRL pair.
A Forex trader can purchase the Greenback and sell the Real to make money from the predicted uptrend. The long position can be taken near 3.1980. To make sure that the account remains protected against unexpected price movement, a stop-loss order can be placed below 3.18. The long position can be sold near 3.2280. Traders with risk appetite can wait for the level of 3.25.
A one-touch call option can be traded to gain from the imminent rise in the exchange rate of the USDBRL pair. The strike price for the call option should be preferably in the range of 3.2200 to 3.2300. To ensure that adequate time is given for the exchange rate to move up to the desired level, a one month time period should be selected for the expiry of the contract.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
