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CHF ahead of further weakness, BRL's rally is complete
Brazilian real declines after massive rally
Over the last four weeks the Brazilian real rallied more than 7% against the greenback amid easing political uncertainties. USD/BRL fell from 3.3485 to 3.1111 before stabilising at around 3.1450. The move came on the back of falling odds that Michel Temer would face corruption prosecutions together with the approval by Senate of a labour reform. Even though Michel Temer is not out of the wood yet, investors did not wait the final outcome to jump back into USD/BRL’s juicy carry trade.
However, the rapid appreciation of the real has triggered massive profit taking over the last few days, suggesting that investors do not anticipate further gains. Indeed, USD/BRL erased completely the gains resulting from speculations about Temer’s potential impeachment and has since then stabilised.
We do not rule out further marginal appreciation of the real. However, the correction is not complete and further positive developments on the political side, especially regarding the fiscal situation of the country, are required for justifying a stronger real. In addition, we expect the USD to get one’s head out of the water as the Fed’s tightening story will move back to the front stage, while the BCB is expected to continue easing monetary condition, which would reduce gradually the incentive to play the carry.
More Selling CHF to come
Judging from the bullish rush in the Euro the global reflation trade is back on. Investors are piling into risky asset to capture real returns, driving inflows into equities (relative growth over value) and EM. Tomorrow fed meeting is unlikely to shift the current markets psyche also a minor, short term correction in USD oversold positing is possible. Commodities prices have continued to move higher lead by crude prices. OPEC meeting today failed to indicate additional supply cuts yet crude prices remained bullish.
Nigeria and Libya ruled out cuts as they restored disrupted productions facilities, while both Russia and Oman have indicated that further productions limits would not support oil prices. On the other side of the trade, Halliburton has suggest that the shale boom is decelerating. Even the chaos in the US president trump administrations with son in-law Kusher denying improper Russian contact and rumors of foreign secretary Tillerson resignations later this summer has failed to derail the reflation trade. Stronger commodity prices should provide support for interest rates, which have already falling significantly. With risk to further downside in yields, low yielding currencies should come under selling pressure. Reiterated the standard corporate line, SNB’s Jordan stated that the CHF was still considerably overvalued.
The JPY has been difficult to call due to the expectations for a shift in monetary policy however; the SNB is clearly going nowhere. With buying pressure, subsiding from CHF the central bank can sustain its current policy indefinably (unlike the BoJ, which continues to expand balance sheet). We anticipate further CHF deprecation against most G10 and EM currencies in the current environment.