USD/BRL: A return towards the late-July low of 4.70 is on hold unless the Real can overcome 4.84 – SocGen

Economists at Société Générale analyze USD/BRL outlook ahead of the interest rate decision from the Brazilian central bank (Banco Central do Brasil, BCB). 

Erosion of positive carry should put a brake on BRL appreciation

The return of inflation to the central bank target range and the rise in real rates have cleared the path for the BCB to lower the Selic rate to 12.75%.

The guidance for further policy easing is likely to be maintained for the next two meetings, meaning rates would end the year at 11.75%. 

The path of inflation will determine the speed of future accommodation in 2024, but based on the current conditions, we estimate the policy rate could drop to 8.75% by the end of next year. This erosion of positive carry should put a brake on BRL appreciation. 

Tactically, a return towards the late-July low of 4.70 is on hold unless the real can overcome 4.84.