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TALKING POINTS – BRAZIL GDP, BRL FORECAST, IBOVESPA, TRADE WARS, PENSION REFORM

  • BRL, Ibovespa eyeing local inflation, GDP data
  • Analysts are expecting weakness in first quarter
  • How could this impact Brazil’s monetary policy?

See our free guide to learn how to use economic news in your trading strategy!

BRL and the benchmark Ibovespa equity index will be at the mercy of upcoming inflation and Q1 GDP data. Quarter-on-quarter forecasts have the economy contracting 0.2 percent in Q1, while year-on-year growth is expected to show a 0.5 percent reading. Central bank officials at the most recent policy meeting stated that weakness at the end of last year has continued into the first breathes of 2019.

Volatility and capital flight are more likely to occur if the report shows that the economy contracted even more than economists were anticipating. USDBRL in this scenario would likely jump above 4.0000 after recently breaking below it, and Ibovespa futures will likely find themselves once again below the 11-month rising support. Brazilian assets may struggle to recover if data undershoots the already-low low forecast.

Will USDBRL have enough resolve to continue above 4.0000?

Chart analysis: USDBRL

This comes on the heels of a recent meeting between Brazilian Vice President Hamilton Mourao and high-level Chinese officials where both parties discussed ways in which to promote investment and deepen commercial ties. Officials in San Paulo have done their best to navigate between the US-China trade war by taking a neutral stance in order to avoid losing access to both markets.

However, while Latin America’s largest economy may avoid being in the direct line of fire, weakening demand out of China – a key trading partner and significant consumer of Brazilian soybean products – will continue to affect Brazil’s economy. Deteriorating diplomatic ties between Beijing and Washington have played a role in causing capital flight from BRL and the Ibovespa as investors’ risk appetite sours.

Eroding confidence in the government’s ability to pass key structural reforms has also been a factor that has spooked investors. Unless officials in Sao Paulo can manage to push them through Congress this year, economists estimate that the probability of a recession over the next two years will increase. This could then ripple out into global financial markets and add uncertainty to an already-cloudy outlook for global growth.

Ibovespa futures struggle to stay above rising support

Chart analysis: Ibovespa

BRL TRADING RESOURCES

--- Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter