USD/BRL Forecast: Dollar Finds Support

• The US dollar initially fell against the Brazilian real on Tuesday but found enough support to turn things around near the 5.40 level.
• This is a market that a lot of people will be paying close attention to, because it has been such a strong uptrend in favor of the greenback that it makes for a great trading environment.

As things stand right now, it looks very much like a market that you continue to step in and take advantage of “cheap greenbacks” anytime you get the opportunity. The 5.30 level underneath is an area that has previously been a swing high, so it does very much look like it could offer support on a pullback. In that area, I would anticipate seeing a lot of noise, and perhaps a lot of interest in the market.

South America

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The Brazilian real is considered to be one of the major currencies for South America, so will keep in mind that this is a general “catch all” for forex traders trying to play growth or interest rates in South America. On the other side of the equation, we have the US dollar which of course represents safety, which is something that people seem to be focusing on, at least when it comes to South America. This suggests that South America will continue to struggle overall, and the Brazilian real by extension will be punished.

Keep in mind that Brazil offers a 10.5% interest rate, which is basically double what we have in the United States, and therefore you are paying to get long of this market, but the momentum has clearly shifted away from Brazil. Ironically, the totality of opinion on the Brazilian real was that it should have strengthen this year, but we have seen the exact opposite happen. The biggest concerns in Brazil tend to stem from fiscal concerns with the government budget, and the fact that some of its major exports, such as coffee, has seen a bit of a selloff as of late.

All things being equal, looks very much like Brazil will continue to see outflows of currency, and it’s likely that the US dollar will eventually go looking to the 5.50 BRL level above. This doesn’t mean that it will be easy, but I think that’s where we are heading.

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