UBS analysts have identified several factors that could provide a positive outlook for the Brazilian real (BRL), despite acknowledging that the currency has a challenging journey ahead. The company noted that carry for the BRL has doubled over the past six months and is approaching levels that could stabilize the currency. Furthermore, UBS pointed out that the current market positioning is quite light and valuations appear very cheap.
UBS also highlighted the potential for current account improvements, driven by strong agricultural production in the first quarter of the year. These factors, combined with the stabilization of additional pressures on the BRL towards the end of 2024, including unusually high outflows due to dividend payments and a reappraisal of the Federal Reserve’s hawkish stance, could provide some support to the Real .
In contrast, the Mexican peso (MXN) faces different conditions, with UBS noting that it is pricing in very little currency premium. The Central Bank of Mexico (Banxico) seems prepared to cut interest rates, which could have consequences for the Peso. In addition, Mexico faces exposure to potential U.S. tariff and policy risks.
On the numbers front, UBS reported inflation figures for Mexico in mid-January of -0.02% month-on-month, which equates to an annual rate of 4.36%. While inflation is expected to slow in January due to electricity price cuts, UBS expects it to accelerate in February, with inflation estimated at between 1.2% and 1.3% on a monthly basis. UBS’s analysis provides a detailed look at the potential economic indicators that could impact BRL and MXN in the near term.
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