On Sunday, just one week after Luiz Ignacio Lula da Silva was sworn in as president, the Supporters of former President Jair Bolsonaro stormed the Brazilian Congress and other buildings to protest against the result of the 2022 presidential election and the new administration. The analysts of Wells Fargo They point out that although political risk is typically high in Brazil, they believe these events will not have a lasting impact on local financial markets or the economy. Still seeing USD/BRL around 5.30 at the end of Q1.
Events of the past weekend are unlikely to weigh on the BRL
“Despite the heightened political risk, we maintain our view that the USD/BRL exchange rate can be around 5.30L by the end of the first quarter of 2023 and that the real may strengthen towards 5.00 by the end of this year. We also believe that the events of the past weekend do not alter the course of the Central Bank of Brazil’s (BCB) monetary policy, and we continue to believe that BCB policymakers will initiate an easing cycle in the third quarter of this year. And in terms of the economy, our base case is intact, and we believe that the Brazilian economy will enter a mild and modest recession in the middle of this year.”
“In the short term, we will focus on the Lula government’s reaction to the riots, especially considering that the federal intervention will be in effect until the end of the month.”
“In the medium and long term, Lula’s fiscal policy will probably be the driver of the currency. Should future fiscal policies result in further erosion of fiscal responsibility, we would turn completely negative on the currency for all of 2023, and our 5.00 target would be adjusted to reflect an outlook for a weak Brazilian real through the end of this year.”
Source: Fx Street
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