The impeachment of President Dilma Rousseff and the appointment of Michel Temer as acting President, in May 2016, reinstated confidence in the mind of investors about the Brazilian economy. The fiscal prudence shown by Temer and the actions taken by Ilan Goldfajn, the new President of Banco Central do Brasil, also ensured the recovery of the Real to 3.1012 against the Greenback in the recent months.
However, the victory of Donald Trump triggered a reversal in the USDBRL pair. After hitting a high of 3.5080, the USDBRL pair entered into a small correction and closed at 3.4290 on Friday. The strong rise of the Greenback and the plethora of issues faced by the Brazilian economy, as explained below, indicate that the uptrend that has begun in the USDBRL pair will continue in the forthcoming weeks.
In spite of having an interest rate of 14%, the inflation rate continues to remain high in Brazil. The consumer prices increased by 7.87% y-o-y in October. The reported inflation rate was far higher than the Brazil central bank’s target rate of 4.5%. The Brazilian economy contracted 0.6% q-o-q in the second quarter of 2016.
The unemployment rate at the end of the September quarter was a staggering 11.8%. It is the highest level since 2012. The analysts believe that the measures taken by Temer will create a positive impact on the economy. However, it is too early to confirm a revival of the economy.
In the case of the US, the unemployment claims have declined to a four-decade low. According to the Department of Labor, for the week ended November 12, the jobless claims declined to 235,000.
Similarly, the Census Bureau reported that the number of building permits increased to a nine-year high of 1.23 million in October and higher than the analyst’s forecast of 1.19 million.
Finally, the victory of Donald Trump has immensely strengthened the US dollar and it is unlikely to weaken in the short-term. Any weakness should be used only as an opportunity to go long as the probability of a rate hike in December has increased to about 80% in recent weeks. Thus, we can anticipate the USDBRL to strengthen further in the days leading to the FOMC meeting.
The USDBRL pair is trading firmly above the 50-day moving average of 3.2650. This reflects the underlying bullishness in the asset pair. The MACD indicator is gaining further ground above the zero line.
Based on the above discussed technical aspects, we can anticipate the USDBRL pair to rise further. A look at the historic price chart reveals the existence of major resistance at 3.6100. Thus, it would be wise to book profit near the resistance, after entering into a long position at about 3.38. A stop-loss order near the level of 3.30 can be used to keep the unexpected losses under control. The risk to reward ratio for the trade is nearly 1:3.
To construct an equivalent of a long trade in the binary market, a trader can invest up to 2% of the total capital in a one-touch call option. The trader should also look for a strike price lesser than 3.50 and an expiry date in the third week of December.
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.
