Trading The Brazilian Real: What To Know

Brazil may be popular for various things such as football, samba etc., but fewer people may know that it is one of the top emerging markets in the world. The Brazilian real (BRL), the country’s official currency, is also not so famous even though it belongs to one of the largest economies in the Latin America (LATAM) area.

Reading our blog, you will have the opportunity to review some interesting information regarding trading the Brazilian real, the Brazilian economy and what analysts forecast about it.

Brazilian Economy Overview

Brazil is one of the most important emerging markets and a member of the BRICS group. The Brazilian economy is the third-largest in the American continent and the biggest in the southern hemisphere. The International Monetary Fund (IMF) ranked Brazil in tenth place when it comes to the size of gross domestic product (GDP) globally.

The IMF’s latest World Economic Outlook, published in July 2023, suggests that the Brazilian economy could grow by 2.1% in 2023, a significant upgrade when compared to April’s forecast which mentioned a 1.2% growth rate for this year. Next year’s forecast has also been reevaluated by IMF’s analysts as now they expect a 1.2% expansion rate, while in April they were forecasting that the economy would shrink by 0.3%.

The IMF has expressed its support related to economic reforms in the country in a report released in May that said: “Enhancing Brazil's fiscal framework, broadening the tax base, and tackling spending rigidities would support sustainability and credibility. IMF’s staff recommends a more ambitious fiscal effort that continues beyond 2026 to put debt on a firmly declining path, while protecting social and investment spending.”

Media reports citing a central bank of Brazil (Banco Central do Brasil-BCB) report (available here in Portuguese) said that the bank now expects a 2.2% GDP growth in 2023, a significant upgrade from its previous forecast.

The Brazilian Real And The Digital Real!

Elaborating on Brazil’s central bank, it’s worth mentioning that it was established in December 1964. According to the bank’s website, “among the main tasks of the Banco Central do Brasil (BCB) are the execution of the monetary, exchange and credit policies, as well as financial relations policy abroad; the regulation and supervision of the National Financial System (SFN) and the management and operation of the Brazilian Payment System (SPB) and the money supply.” 

The Brazilian real replaced the cruzeiro real almost 30 years ago and it is the world’s 19th most traded currency according to the Triennial Central Bank Survey published by the Bank for International Settlements. Brazil’s currency value has a history of significant fluctuations, other times depreciating and other strengthening on the back of each government’s economic policies.  

One more that should be noted is that Brazil seems to be a pioneer regarding digital currencies as it is on course to issue the first Central Bank Digital Currency (CDBC) in 2023. The IMF has praised the local central bank saying, “the Brazilian central bank is at the forefront of financial innovation. The goal of the CBDC is to provide a secure platform for the private sector to create innovative solutions using new technologies.” 

Trading the Brazilian Real And Its Performance

As you can see in the monthly trading chart below, the Brazilian real traded between BRL 3.6 - 4.4 against the US dollar in 2018 and 2019.

However, in the next 12 months, the Brazilian currency depreciated against its US counterpart, with the exchange rate reaching BRL 5.7 in October 2020.

The rate fluctuated in 2021 above the BRL 5.0 level, while in mid-2022, the Brazilian real gained some ground, trading at BRL 4.6 against the US dollar. The central bank’s monetary policy has helped the Brazilian real strengthen since the beginning of 2023, as you can see in the daily chart above.

What Do Analysts Forecast Regarding The Brazilian Real?

Brazil's central bank cut its benchmark interest rate by 50 basis points on September 20th, as it signalled last month, and suggested that further reductions of the same magnitude could lie ahead.

The bank kicked off the easing cycle with a split decision in August and continued the rate reduction this month as the rate-setting committee, called Copom, voted unanimously to cut its benchmark Selic rate to 12.75%. Copom’s announcement also noted that “regarding the domestic scenario, economic activity showed stronger resiliency than previously expected, but the Committee continues to anticipate economic deceleration for the next quarters. As expected, twelve-month headline consumer inflation increased in the recent period. Various measures of underlying inflation have recently fallen but remain above the inflation target.”

Economists at Commerzbank wrote in a report that the Brazilian real’s strong level is justified for now. “Brazil's inflation rate rose as expected in August, but monthly inflation was slightly below expectations. In light of this development, even the most sceptical should forgive the Banco Central do Brasil (BCB) for kicking off the rate-cutting cycle last month with a surprisingly sharp 50 bps cut. Furthermore, with inflation expected to remain below 5% for the time being, the expected further 50 bps easing at each of the remaining three meetings this year to a policy rate of 11.75% by year-end is, in our view, far from aggressive. We therefore continue to believe that the Brazilian Real's strong level is justified for now,” they noted.

The Bank of America raised its forecast for Brazil’s economic growth, citing falling interest rates, a resilient labour market and an improving investment climate. The bank revised its forecast regarding the 2023 GDP growth rate to 3% from 2.3%, saying that rising welfare payments helped consumers endure rising borrowing costs. As for 2024, the Brazilian economy could expand by 2.2%, higher than a previous forecast of 1.8%.

Trading the Brazilian Real And Reducing Risks

The Brazilian economy seems to have potential due to its characteristics and is one of the most significant in the emerging markets group of countries. Therefore, the Brazilian real could also rise on the back of a resilient local economy. Beginner traders who’d like to trade the Brazilian real against major currencies such as the US dollar or the British pound should be careful as trading forex pairs comes with potential risks. Wrong or not well calculated moves may incur losses.

How can you avoid this as a beginner trader? The answer is that there are two ways. Firstly, you can study and take advantage of educational materials provided by brokers and prepared by experienced traders. E-books, guides, blogs, webinars and videos are surely a good start for beginner traders who want to improve their trading techniques. 

Another way to reduce risks when trading the Brazilian real is to adopt a risk management approach. Risk management does not mean that you should avoid trading certain financial instruments but includes special automated trading tools that can put a stop when markets move against your plans. The stop-loss order is a popular risk management tool, but there are more that can take some anxiety off your back. Learn how to use them and improve your trading experience.

Does trading on macroeconomic news interest you? Learn how this approach works with our free webinars. Meet and interact with experienced traders. Watch and learn from live trading sessions.

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.