Brazilian Real, Ibovespa Index Forecast: Major Breakout Ahead？

TALKING POINTS – USDBRL FORECAST, IBOVESPA CHART ANALYSIS, PENSION REFORMS, FED MONETARY POLICY

• USDBRL is cautiously hovering around key support at 3.85040

• Ibovespa index re-enters critical resistance range – will it hold？

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• Local retail sales data could introduce additionality volatility

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USDBRL TECHNICAL ANALYSIS

In May, USDBRL reached an 8-month high after blasting through the psychological barrier at 4.0000. However, it has since lost over six percent and is now hovering around key support at 3.8504. This followed USDBRLs break below the January rising support channel (parallel red lines), a serious deviation from the 6-month uptrend.

The rapidity of USDBRL‘s decline – relative to how long it took for the pair to get there – after reaching past 4.0000 is telling. It could be a signal that traders don’t believe that such a high exchange rate is justified given shifts in the fundamental outlook which may be supportive of strength in BRL. These include increased expectations that the Fed will cut rates along with cautious optimism that Brazilian pension reforms will pass.

IBOVESPA OUTLOOK

The benchmark Ibovespa equity index on June 11 closed at 98960, the highest since March. It also penetrated the lower lip of the 98588.63-100438.87 range (turquoise dotted lines). Despite the significant break, traders may wait for follow-through before committing capital. The next barrier will be the upper range, though touching the 100,000 mark will likely be an inter-range obstacle investors will have to overcome.

If the break is met with follow-through, the index may trade within the price parameters before capitulating or breaking higher. The direction of the index at this critical juncture will either signal that investors are confident in the countrys trajectory – enough so to commit capital – or they believe that the outlook is too bleak to risk gaining or increasing their exposure to it.

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BRAZIL RETAIL SALES DATA

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Local retail sales data may have a conflicting impact on BRL and Ibovespa because of how it may influence the Brazilian central banks monetary policy. A weak reading could increase rate cut expectations from Banco do Brasil, and the prospect of a weaker Real would likely push USDBRL higher while boosting local equities from the prospect of cheaper credit.

However, it is worth noting that a single data point will not alleviate the anxiety investors have over Brazils growth trajectory. Monetary authorities have already trimmed GDP forecasts for the year and the uncertainty over global growth and local pension reforms will likely continue to be the dominant themes driving price action in local markets.

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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