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The USD/BRL currency pair is expected to face upside risks, stemming from the uncertainties over the adoption of pension reforms by the Brazilian central bank (BCB), in its monetary policy meeting, scheduled for later today – probably the last one under current governor Ilan Goldfajn.
It is seen to be a non-dramatic meeting, with rates seen on hold at 6.5 percent. Rather, the governor’s assessment of the current economic scenario will be interesting to watch, especially after last week's Fed meeting, according to the latest research report from Commerzbank.
Details will probably only be published in the minutes of the meeting. However, first indications may already be found in the accompanying statement.
At its last meeting in December, the BCB switched from rather hawkish to neutral. There is now speculation on the market as to whether the next step by the central bank could be an interest rate cut rather than an increase.
"We think such speculation is way premature. After all, the pension reform still has to be passed, with the risk that the current government will also fail to bring it through Congress. The central bank had always stressed that fiscal policy reforms were necessary to keep inflation in check," You-Na Park, Analyst at Commerzbank noted.
Adding to it, Commerzbank noted, "Against this backdrop, the BCB is expected stay cautious and not fuel rate cut speculation further. This is basically good news for the BRL. However, the focus of the FX market is on pension reform. And as long as there are no clear indications of a possible adoption in this respect, the BRL should not be able to gain further from current levels."
