Brazilian Real Bulls Eyeing Economic Activity Data - What’s Ahead?
TALKING POINTS – BRAZILIAN REAL, USD/BRL, BOLSONARO
- Real bulls waiting for economic activity data report
- Will the data resultpush USD/BRL past 3.7556?
- Outlook for the economy heavily depends on reforms
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Brazil’s central bank will be releasing its year-on-year economic activity report Thursday at 10:30 GMT. The forecast is 1.80% with the previous at 2.99%. The data gives an estimate on the overall activity in the economy and is frequently published before quarterly GDP forecasts. The report is particularly important because of the potentially significant market-moving reforms that are scheduled to come this year.
The reforms are being spearheaded by University of Chicago-graduate Paulo Guedes, a staunch advocate of privatization and deregulation and economic advisor to President Jair Bolsonaro. One of the major planned changes is a reduction in Brazil’s swollen pension system. It is the biggest contributing factor to Brazil’s unsustainable budget deficit and growing debt, both of which have kept investors at arms-length.
However, if Bolsonaro’s government can push these reforms through the National Congress, international investors will flock to the country’s assets and provide a boost to the Brazilian Real. These reforms are what will likely make the Real the best performing emerging market currency in 2019.
As of this moment, USD/BRL is on the verge of confirming a bearish reversal patter. The momentum behind this reversal is likely being driven by investors that are optimistic Bolsonaro will be able to deliver the reforms he promised. Despite approaching the upper layer of the support range at 3.6645, USD/BRL rebounded over 1% since reaching its lowest point at 3.6750, to now trading at 3.7370.
USD/BRL – 3 Hour Chart
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However, recently, economic data in Brazil has been broadly underperforming relative to expectations, particularly industrial production, retail sales and inflation indicators. Consequently, the likelihood that the data will surpass expectations is not optimistic and the potential shortcoming may push USD/BRL further up and away from key reversal levels.
On a global scale, Brazil also still must contend with forecasts of slower global growth and geopolitical shifts that will likely cause investors to be more risk-averse, and therefore less likely to invest in Brazil.
Looking ahead, the central bank will be releasing key economic indicators in the next two weeks ranging from inflation reports to the budget balance. Follow the outcome of these reports and the market reaction at @ZabelinDimitri.
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--- Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com
To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter