Goldman Sachs lowered its exchange-rate forecasts for the U.S. dollar against the Brazilian real, updating projections to 4.90 in three months, 5.00 in six months and 5.00 in 12 months. Those estimates replace earlier forecasts of 5.20, 5.30 and 5.30 respectively.
The bank attributes the real's strong year-to-date performance to three main forces. First, Brazil's terms of trade have surged over the past couple of months. Second, a recovery in risky assets has supported emerging-market currencies. Third, the real benefits from elevated carry, a level the bank notes is matched only by the Colombian peso.
Goldman Sachs expects the real to continue outperforming peers provided two conditions hold: that energy prices remain elevated and that risk sentiment does not deteriorate. The firm cautions, however, that higher inflationary pressures in Brazil could keep the Banco Central do Brasil on a more cautious path toward easing. Reflecting that view, Goldman Sachs economists now forecast a 25-basis-point rate cut at next week's policy meeting.
On risks, Goldman Sachs identifies a reversal of the recent recovery in risk appetite as the principal near-term threat to returns on the real. As a tactical measure, the firm recommends expressing long positions in the real using Chilean peso funding when seeking a more risk-neutral exposure, a structure intended to add resilience to positions.
Looking further ahead, the bank expects the balance of risks for the real's spot performance to shift from global drivers to domestic factors as Brazil's October presidential election approaches. Goldman Sachs notes that, while it previously viewed election-related risks as asymmetric in favor of further real appreciation, the rapid rally so far this year has made those risks more two-sided.
Context and implications
- Goldman Sachs has materially lowered its USD/BRL forecasts across three horizons while keeping the same directional view that the real has room to outperform.
- Monetary-policy expectations and energy-price dynamics are central to the bank's outlook for Brazilian rates and the currency.
- As political risk becomes more salient ahead of the election, local developments are expected to play an increasing role in spot moves.