BofA Recommends Betting on the Brazilian Real
The US dollar surged more than 25% in Brazil during 2024. Rather than viewing this as a cause for concern, Bank of America (BofA) believes now is the time to invest in the Brazilian real.
Brazil wrapped up a financially turbulent 2024, with the real appreciating over 25% and the Central Bank of Brazil selling more than $40 billion of its reserves between September and December to stabilize the currency. Against this backdrop, one of the world’s leading banks has encouraged its clients to consider the Brazilian real, arguing that it is significantly undervalued.
The USD/BRL exchange rate is currently at 6.03, after reaching a peak of 6.3 in December.
Bank of America Sees Undervaluation
“We recommend a long position in reais with a tactical focus,” highlights a report from Bank of America on Latin America. The report emphasizes that “the Brazilian real is substantially undervalued” and points out that Brazil’s real interest rates are the highest among emerging markets. Additionally, the current account balance is expected to improve in the fourth quarter of 2024.
However, BofA tempers its recommendation with caution: “President Luiz Inácio Lula da Silva’s administration has yet to show a decisive commitment to fiscal policy adjustments and public spending controls.”
The bank warns that without this critical catalyst, the real will not appreciate more than 20% of its potential. BofA also highlights risks to this strategy, including worsening fiscal outlooks in Brazil or rising oil prices.
JPMorgan’s Perspective on Brazil’s Central Bank Reserves
According to a report published by JPMorgan, Brazil’s gross reserves began the year above $325 billion, pushing net reserves to nearly $250 billion—more than 11% of the country’s GDP. While this level is comfortable compared to Brazil’s external debt, it remains significantly below the figures seen in recent years.
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