Brazil used Donald Trump’s first trade war as an opportunity to boost its exports. Currently, it is in negotiations with China, Mexico, and Japan to achieve a similar outcome. This is just one of the many strategic advantages that Brazil possesses. Let’s discuss this topic and make a trading plan for the USDBRL pair.
The article covers the following subjects:
Major Takeaways
- The Brazilian real is among the top three currencies on Forex.
- The trade war will allow Brazil to increase exports.
- Capital inflow to the stock index will support the real.
- Short trades on the USDBRL pair can be opened with targets at 5.56 and 5.35.
Monthly Fundamental Forecast for Brazilian Real
In the current economic climate, it is essential to identify potential opportunities amid the ongoing turmoil. While investors are debating who will suffer more from the global trade war — the US, China, or the EU — one thing is clear: Brazil stands to gain significantly from this situation. Eight years ago, it leveraged the trade tensions between Washington and Beijing to boost its exports, and now Brasilia is proactively exploiting that experience. This is one of the key factors contributing to the 8% year-to-date decline in the USDBRL rate.
The Brazilian real has outperformed other major currencies, ranking third among the thirty currencies tracked by Bloomberg, after the Russian ruble and the Swedish krona. Brazil is a relatively closed economy, with exports accounting for 18% of its GDP. In comparison, Mexico has 30%, Canada has 33%, and Germany has 42%. This suggests that the South American country will be less affected by trade wars and the associated slowdown of the global economy. In addition, Brazil’s foreign trade deficit with the US mitigates the risk of being blacklisted.
US Trade Deficit
Source: Bloomberg.
During Donald Trump’s first trade war, Brazil successfully talked China into buying its agricultural products in retaliation against the US. As a result, American farmers suffered losses amounting to nearly $26 billion. Presently, the President of Brazil, Luiz Inácio Lula da Silva, is negotiating with Mexico, Japan, and China, offering them their goods. He asserts that the White House should not act as the global sheriff and that other nations should overcome the protectionism of the United States to ensure free trade.
Along with the increase in exports and the associated GDP growth, Brazil and its national currency can also count on another strong trump card – capital spillover from the US to South America. The Ibovespa stock index surged 18% in US dollar terms, posting its best performance since 2022. This outcome surpassed the performance of emerging markets, not to mention a 4.6% decline in the S&P 500 index.
Global Stock Indices Performance
Source: Bloomberg.
Brazilian equities have shown notable gains due to their undervaluation. In 2024, the broad US stock index surged by more than 20%, while its South American counterpart declined by 30% due to mounting concerns regarding budget deficits. This has led to a P/E ratio of 7.48 for Ibovespa and 20.6 for the S&P 500. Foreign investors have shown notable interest, with investments into Brazil’s stock market reaching R$12 billion, the highest figure since 2022, driven by the country’s undervaluation and expected favorable outcome in the ongoing trade negotiations.
Monthly USDBRL Trading Plan
Brazil can get the most out of the crisis in international trade and the global economy and increase exports, attracting foreign capital to its market. Against this backdrop, the USDBRL pair will likely continue to trade within a downward trend, reaching the levels of 5.56 and 5.35. Therefore, selling the greenback against the real on pullbacks can be a lucrative trading opportunity.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance broker. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2014/65/EU.
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