Economists at Credit Suisse now see scope for the Brazilian real to strengthen as far as 5.35 against the US dollar in the near-term, but see turning structurally bullish as premature.

Medium-term, a return to Q1 highs in USD/BRL remains unlikely

“The political risk picture has improved in Brazil, and inflation breakevens have stabilized: we see this as tactically helpful for BRL, consistent with USD/BRL trading as low as 5.35 in the near-term.”

“We however see turning structurally constructive on BRL as premature, as the political picture is likely to heat up again in two weeks and the turn in inflation is still tentative.”

“Medium-term, we maintain 5.80 as the top end of the target range, but the evidence of a large amount of risk premium priced into local assets that emerged from recent price action overall reinforces the idea that the bar for a return to Q1 highs, even under adverse political outcomes, is very high.”