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Research Market strategy
by Swissquote Analysts
Daily Market Brief

BRL to profit from political developments

Summer lull ends for the BRL

By Arnaud Masset

After a bumpy start into the summer, caused by the temporary rise in political uncertainty, the Brazilian real has finally returned to its pre-crisis level and stabilised at around 3.15. 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.

Interest rates moved accordingly with the 2-year swaps rates consolidating slightly above 8.5%, while on the longer-end of the curve, the 10-year yield stabilised at around 10%. Finally, even though they took their time, CDS rates returned to their pre-crisis levels with the 5-year and 10-year trading at 203bps and 320bps, respectively.

However, since the end of July, USD/BRL has been treading water as investors await impatiently further positive developments on the political side, especially regarding the fiscal situation of the country. Indeed, with inflation back under control, investors will focus almost exclusively on that matter - with the exception of the Fed’s tightening programme - for now on.

The Brazilian government announced it would sell its controlling stake in Eletrobras, Brazil’s largest electricity provider. However, it is far from being a done deal due to regulatory constraint. Nevertheless, those developments are viewed positively by investors as it shows the willingness of Temer’s government to liberalise certain state-held companies. Similar positive developments may ignite a BRL in the coming months should that kind of news continue to flow.

USD/BRL closed at 3.1630 on Tuesday, edging slightly higher by 0.07%. The currency pair will surely gap lower at the opening bell this afternoon as the news will be more than welcomed by investors.

UK - GDP set to continue growing in Q2

By Yann Quelenn

UK Q2 GDP will be released tomorrow morning. The British economy is expected to grow 1.7% for the second quarter (annualized). The growth definitely seems to be robust and solid.

Meanwhile, Brexit negotiations are only making slow progress and fears of a Hard Brexit are still present in the markets. In our view, we consider that a Hard Brexit as very unlikely. European Countries have different trade relations with UK and this leads us to think that it will be very complicated that those members agrees on a consensus regarding the negotiations. It seems definitely complicated that the 27 members will all line up against the UK. As a result, this will likely benefit to the UK during this negotiation period.

Since the Brexit vote, the cable has increased from 1.20 to 1.30 and the pair is consolidating slightly above 1.28. There are further room for a weaker GBP in the medium-term as long as markets believe on a likely Hard Brexit or on tough consequences for the UK economy.

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