BRAZIL: 5.60 Pivot Point Remains Key Short-Term Parameter for USDBRL

• While very much a fundamental swing, USDBRL’s bounce has been assisted by a firmer US dollar in recent sessions and the notable hold of a key medium-term support level, residing at 5.40. This cluster of daily lows from Sep/Oct last year were a focus point before the powerful rally to 6.30 in December that prompted multiple bouts of intervention from the BCB.
• Earlier in the year, 5.60 had proved an important support level, which after breaking, exacerbated USDBRL’s decline across June. Yesterday’s spike into the close retested this level, as well as the 50-day EMA, which now intersects around 5.5750. A sustained break above 5.60 in coming session would be a meaningful bullish development and initially target a move to firm resistance at 5.7632, the May 7 high.
• Goldman Sachs point out that while the political inclination may be to retaliate, they anticipate local exporters to urge the administration to de-escalate. This would likely be required to allow markets to focus on the positive attributes of the BRL outlook once again.
• HSBC believe this is a near-term game changer for the BRL that puts a firm end to the recent rally. That said, it is important to remember that we have been here before - similar escalation with Colombia in January was swiftly resolved through diplomatic back channels - but until this happens, they expect BRL to remain on the back foot.

Source: Bloomberg Finance L.P. / MNI