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Real to strengthen further on commodity price recovery

brazilian realThe USDBRL (US dollar – Brazil Real) currency pair, which hit an eight month low on Monday, bounced back to hit a high of 3.5619, following an intervention from the Central bank of Brazil. However, the uptrend was short-lived.

The Real continues to strengthen against the US dollar not only because of positive economic developments, but also from the political changes that are perceived to be better for the future of the country.

Basically, Brazil is an export dependent commodity based economy.

The country is the second largest producer of Petroleum in South America, behind Venezuela. Brazil’s Vale SA is the world’s biggest producer and exporter of iron ore and pellets. The company ships almost 75% of total iron exports from Brazil.

Both crude oil and iron ore have recovered considerably from their 2016 lows. The crude oil, which hit a low of $26.05 per barrel in January, is currently trading above $40. This corresponds to a gain of over 50%. Similarly, iron ore, which traded at $41.25 in January, is currently trading between $55 and $58 level. The price reflects an increase of about 40% in the past three months. The recovery in the price of these two commodities contributed mainly to the strengthening of the Brazilian Real.

The crude oil is expected to remain range bound between $35 and $45 in the short-term. The proposed output freeze between Russia and Saudi Arabia, if implemented, would further strengthen the price of crude oil. Similarly, the price of iron ore is expected to remain range bound with bullish bias.

Politically, the probability of President Dilma Rousseff’s impeachment on charges of breaking the budget laws is higher. The lower house is expected to vote on Sunday. Investors believe that the new government would take the necessary steps to boost the economy.

BBC News

Finally, the perceived dovish stance of the Fed has considerably weakened the US dollar. The trend is expected to change only when there is firm confirmation of US economic recovery or the announcement of a rate hike by the Fed. Thus, considering the facts, it can be understood that fundamentally, the Real would strengthen further in the weeks to come.

Technically, the USDBRL currency pair has formed a near double top formation as shown in the charts below. Thus, we can expect the currency pair to reach the exchange rate of 3.2370, from where the uptrend started in July 2015. The current exchange rate is also below the 50-day moving average. Furthermore, the main line of the MACD is below the signal and the zero line. Thus, there is little probability of seeing an uptrend for the next few weeks.

USD/BRL Pair: April 14th 2016

USD/BRL Pair: April 14th 2016

Thus, a forex trader should initiate a short position at the current level of 3.49. The stop loss order should be placed above the 3.56 level. The profit should be booked near the 3.39 level.

Binary option traders should look for an opportunity to purchase a one touch put option contract with a strike price of 3.40 or above. Considering the rise in the implied volatility in the recent months, a two week expiry period will be enough for the put option contract.

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