Brazil: upcoming presidential elections could pose a risk for BRL positive outlook - Wells Fargo

Analysts from Wells Fargo, expect modest gains ahead for the Real and they remain optimistic for the prospects in the immediate future for Brazil, but cautious.

Key Quotes: 

“The Brazilian real has struggled somewhat in 2017 after its outperformance in 2016, likely a reflection of ongoing political challenges and a still-nascent economic recovery. Indeed, the real is essentially unchanged against the greenback in a year when most emerging currencies have displayed solid gains. Going forward, however, we expect the Brazilian currency to gain on trend against the U.S. dollar. The economic recovery that is currently underway in Brazil should be a key factor of support for the real, particularly as the recovery gathers pace and becomes more broad-based. Moreover, Brazil’s high real interest rates—among the highest in emerging markets—should remain a key factor of support for the Brazilian real, particularly as Brazil’s central bank has likely neared the end of its monetary policy easing cycle.” 

“The upcoming presidential elections in Brazil could pose a risk to our positive outlook for the real, particularly given the prevailing uncertainty around the country’s fiscal situation. Political and fiscal concerns could perhaps limit the extent of medium-term gains in the real, and it is unlikely that the real will perform as strongly as it did during 2016 going forward. However, we still see Brazilian fundamentals as consistent with modest strength in the real over time, particularly given our outlook for trend U.S. dollar weakness over the medium term.”

“Although the Brazilian economy has turned the corner, there are plenty of risks on the horizon that can sour our projections regarding Brazil. These risks are probably similar to those that have burdened the economy over the past several years. However, the magnitude of these risks on the economy going forward, if they come through, would pale compared to what we have seen in the past several years.”

“Thus, we remain optimistic for the prospects in the immediate future, but cautious, pointing to the presidential cycle next year as well as the delicate fiscal situation today. Thus, any improvement on this front will be positive news for the prospects of the overall economy. However, we point out that the economy is close to firing on all cylinders, and this means that growth could probably surprise on the upside over the next several years if the political risks remain contained.”