Record Unemployment Rate Turns Brazilian Real Weak

Record Unemployment Rate Turns Brazilian Real Weak
August 17, 2016

‘Brazil’ is a popular search term at the moment due to two likely items: The Olympics and the rise of the Brazilian Real.

Searches related to the Olympics may or may not be relevant to a financial market participant. However, the search for the Real is certainly a matter to be closely watched by Forex traders. There has been a vigorous strengthening of the Real in the past two months. The USDBRL pair’s unabated decline from a high of 3.6353 to a low of 3.1131 has already raised the eyebrows of several speculators. While there are some analysts who believe that the Real will strengthen further, we believe that the decline has come to a short-term end, for reasons explored below.

After contracting by 3.7% last year, the Brazil’s economy is still struggling. The economy is projected to contract by 3.3% in 2016. The view is confirmed by the Markit’s manufacturing Purchase Manager’s Index (PMI) reading of 46 in July. Even though there are signs of recovery, the economy is still only expected to expand around 1% in 2017. In the quarter ended June, the unemployment rate hit 11.3%, up from 11.2% in the prior quarter – the highest rate in the past four years.

In July, the trade surplus of Brazil widened to $4.58 billion, but this remained below the analysts’ expectation of $4.95 billion. Furthermore, the trade surplus was a result of 27.4% y-o-y decline in imports to $11.75 billion and not because of a rise in the exports, which decreased 11.9% to $16.33 billion.

On the other hand, the US economic data continues to remain mixed. Even though the market participants are not expecting a rate hike any time soon, the safe haven appeal of the US dollar continues to keep it strong. In particular, the continuing uncertainty in Europe and economic decline in China has forced investors to turn to the USD (and other safe haven assets) to protect their wealth. This scenario will continue to keep the US dollar strong until there are signals for firm economic recovery around the globe.

Technically, the USDBRL pair is forming the handle of a cup and saucer pattern. The immediate support on the downside exists at 3.1380, while the major resistance is at 3.2440. The MACD is reflecting the change from a bearish to bullish scenario.

USDBRL - Technical Analysis - 17th August 2016

For a forex trader, buying the USDBRL pair with an anticipation of an uptrend would be better in the current situation. The long position can be taken near 3.14 with a stop loss below 3.10. The long position can be closed near 3.24.

A binary trader can select a one touch call option contract from a broker of his choice. Before entering the trade, the trader should make sure that the strike price is about 3.24 and the contract expiry date is in the third-week of September.



Sammy is our forex expert, with over 20 years experience in the financial sector, she will be keeping you up to date with the ups and downs of currencies around the world

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