USD/BRL: An overvalued currency – Lloyds Bank

According to the analysts at Lloyds Bank, the move higher in USD/BRL over the past month only confirmed their view of an overvalued real.

Key Quotes

“Efforts by the Brazilian government to press ahead with long-term pension reform appear to have met resistance in congress. A weaker real in response, suggests investors overestimated what could be achieved in terms of fiscal reform. Without continued positive political momentum that drove USD/BRL sharply lower last year, there is a strong case for the Brazilian real to weaken modestly against the US dollar. For one, the Brazilian central bank is likely to continue to lower interest rates this year in the face of falling inflation and a weak economy. This would erode the carry benefit of holding Brazilian real in the coming months.”

“Our own estimates suggest that the Brazilian real is overvalued by around 13% against the US dollar. Still, this would represent only a retracement of the gains the real made last year thanks to Brazil’s better external position.”