USD/BRL Forecast | Will USD/BRL Go Up or Down? (2023)

The Brazilian real (BRL) has been highly volatile against the US dollar (USD) so far in 2022, shifting from being one of the top performers against the greenback earlier in the year to a sell-off in July that made it one of the biggest underperformers among emerging market currencies. The real gained some value in August, returning to its June levels.

In September, the USD/BRL pair bounced around as currency traders evaluated the dollar’s strength against high Brazilian interest rates and an approaching presidential election in October.

The Brazilian central bank was set to leave its key interest rate unchanged at 13.75% on 21 September, while analysts and traders debated whether the US Federal Reserve (Fed) would raise its headline rate by 75 basis points (bps) or more.

What has driven the volatility, and what is the outlook for the foreign exchange (forex; FX) pair for the rest of the year?

In this article, we look at the real’s performance against the US dollar and the latest USD/BRL forecast from analysts.

What drives the USD/BRL pair?

The USD/BRL forex pair refers to the exchange rate for the US dollar – the base currency – against the Brazilian real – the quote currency. The exchange rate shows the value of one US dollar in Brazilian reals.

As with other currencies, the value of the Brazilian real is affected by the country’s economic growth, cross-border trade and monetary policy such as interest rates, which determine its attractiveness as an investment. The BRL is also affected by the demand for commodities, of which Brazil is a net exporter.

Brazil was one of the first countries to be considered an emerging market, forming the BRIC group along with Russia, India and China. As such, overall sentiment on emerging market economies and currencies can also affect the value of the Brazilian real.

The US dollar is the global reserve currency and is affected by sentiment on the world economy as well as economic activity within the US, including manufacturing and employment rates. The dollar acts as a safe haven for investors during times of economic and geopolitical uncertainty.

All of these factors have come into play in determining how the USD/BRL pair has performed this year.

Historical USD/BRL performance

The Brazilian real was introduced as Brazil’s official national currency in July 1994, replacing the cruzeiro real. The real immediately strengthened against the US dollar to a rate of 1.20 as the country’s economic growth attracted inflows from foreign investors. Brazil’s central bank then anchored the real to the US dollar to stabilise it.

The real was partially floated against the dollar in 1999, when Russia’s debt default spread. Investors pulled their funds from emerging markets, including Brazil, setting off a currency crisis that saw the real plummet from 1.20 to 2.15 against the US dollar.

The USD/BRL exchange rate was around 1.76 at the start of 2008, but with the global financial crisis the real entered a long-term downward trend against the dollar. The USD/BRL rate surpassed 5.00 at the start of 2020, with each real worth as little as $0.18 as the Covid-19 pandemic drove investors to seek a safe haven in the US dollar.

The BRL has halted the downward trend, trading largely within the $0.17-$0.20 range over the last two years. It reached a two-year high approaching $0.22 in April this year.

How has USD/BRL performed so far in 2022?

The real started off 2022 as one of the top performing currencies, surprising market analysts by gaining as much as 21% against the dollar in the first quarter.

Analysts at French bank BNP Paribas noted in April that the real benefited from at least three factors: rising commodity prices; a rebalancing among investors away from US technology stocks and Russian assets towards other markets such as Brazil; and relatively high interest rates after nine hikes took the key policy rate from 2% to 11.75% in a year.

However, after reaching a peak in early April, the real has retreated against the US dollar, which at the same time has reached a 20-year high against a basket of currencies. From its 21% year-to-date gain against the dollar to 4.59, from 5.68 on 4 April, the real retreated to 5.50 on 22 July. It has since gained some strength, with the rate falling to 5.03 on 29 August. In September, the USD/BRL pair ranged between 5.09 and 5.25.

The US dollar has rallied on growing concerns that the Fed’s hawkish turn on interest rates since March could see the world’s largest economy enter a recession. Concerns about the impact of Covid-19 restrictions in China on manufacturing activity have also weighed on sentiment in recent months.

The real has begun underperforming against Latin American currencies, with the Mexican peso, for example, climbing in response to strong remittances, rising interest rates and a potential increase in manufacturing activity from US companies relocating production from China. While the Mexican central bank is eyeing at least six more rate increases, the Central Bank of Brazil is tapering its rate hikes.

Traders and observers are looking toward the Brazilian presidential election in October, which is expected to see President Jair Bolsonaro pushing forward government expenditure to gain support as he trails former President Luiz Inácio Lula da Silva in the polls.

In July, Brazil passed a constitutional amendment enabling the government to increase welfare spending by R$41.3bn ($7.7bn) in an attempt to offset the impact of high fuel prices. There was previously a ban on increasing or introducing social benefits during an election year.

What is the USD/BRL forecast for the real against the dollar for the remainder of the year and beyond? How will the election affect the value of the Brazilian real/US dollar pair?

USD/BRL forecast: How will the pair perform?

Dutch bank ING was “bearish on the BRL given the risk that Bolsonaro challenges any Lula win (rigged electronic voting etc) – uncertainty reigns,” according to analyst Chris Turner in the bank’s monthly FX analysis. Turner added on 14 September:

“Higher US rates have sent the dollar higher across the board, including against Latam currencies. A few points to make here.The higher levels of FX volatility we see are bad for the carry trade. While the 12.7% per annum implied yields on Brazil 3m NDFs are undoubtedly attractive, higher volatility could well see the Brazilian real pressured further. There are very close and contentious Presidential elections due early next month and USD/BRL could easily trade back up to 5.45.”

ING’s longer-term USD/BRL forecast indicated that the pair could end the year at 5.70 and move to 6.00 by the end of 2023.

In their September USD/BRL prediction, analysts at UK-based foreign exchange company Monex wrote that “in terms of rates, although the BCB has been ahead of the curve in raising interest rates to fight inflation, the hiking cycle has come to an end.

“The Selic rate now sits at 13.75% and money markets expect them to decline as early as next year as growth conditions deteriorate, fuelled in part by the lagged impact of aggressive monetary tightening. Taking those factors and adding in a hefty dose of political risk that stems from the country’s October presidential election into account, there is a recipe for a stronger USDBRL rate in the near-term, especially if the Fed continues to talk up the US terminal rate. Over the medium-term, once political risk dissipates and global economic conditions stabilise, the Brazilian real could re-emerge as the market's sweetheart.”

Monex’s September forecast revised up its near-term expectations for the value of the real from 5.50 to 5.30 in one month. Its forecast further out was unchanged at 4.80 in 3-6 months and 5.00 in 12 months.

_{Source: BNP Paribas, CIBC, ING, Monex Europe, Scotiabank, Trading Economics, Societe Generale, Wallet Investor}

Forex analysts at State Street were bullish on the near-term outlook for the USD, but bearish over the long term, noting: “The USD is historically expensive and near term overbought. Over the next 3-5 years, we will continue to see ample downside to the USD (15-20%) as we eventually move to acceptable levels of inflation, lower monetary policy rates, and enter the next global recovery cycle. However, these conditions are distant and higher rates and rising recession are likely to support the USD over the coming months.”

Jankiel Santos, analyst at Spanish bank Santander observed that Brazilian “exporters may be finally repatriating resources hoarded abroad between late 2020 and early 2021.

“Given the recent signals conveyed by the BCB that it will keep the Selic target rate at a high level for a long time, credit conditions should become dearer, even for the highly profitable Brazilian export sector. In addition to that, we expect some accommodation on both the world growth and commodity prices on the heels of monetary tightening cycles that are being deployed worldwide. Thus, we believe exporters’ operations will require a larger amount of their own resources, which should lead to further shrinkage of the gap between shipped and financial trade balances. This potential development should help prevent the BRL from excessive weakening.”

Santos added: “On the other hand, we expect less favourable international conditions and lingering uncertainties about the future of domestic economic policy from 2023 onwards to limit the room for a substantial and perennial strengthening of the BRL.”

Algorithm-based forecasting service Wallet Investor indicated in its USD/BRL forecast for 2022 that the real could trade at 5.292 to the dollar by the end of the year and weaken to surpass 6.112 in 2024. Its USD/BRL forecast for 2025 indicated the pair could trade at 6.52 by the end of the year.

Analysts have yet to issue a USD/BRL forecast for 2030.

When consulting forecasts for the US dollar/Brazilian real pair or any other asset, remember that analysts can and do get their predictions wrong. We recommend you always do your own research and consider the latest market trends and news, technical and fundamental analysis, and expert opinion before making any investment decisions. Keep in mind that past performance is no guarantee of future returns. And never invest money you cannot afford to lose.

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