USD Pulls Back Against Brazilian Real

I find it difficult to imagine that with the macroeconomic backdrop that we have, currencies like the Brazilian real will do well against the greenback.

On Wednesday, the US dollar pulled back against the Brazilian real as a reaction to the recent breakout. It now appears that the 5.2 BRL level should offer support, as it was previous resistance. We have finished a “W pattern”, so it will be interesting to see whether or not we can find the necessary momentum to go higher. At this point, it looks as if we are going to check this area for a potential springboard higher, but we need to break above the 5.27 level to confirm that.

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If we do fall from here, the 200-day EMA is at the 5.13 level and rising, just as the 50-day EMA is breaking above the 5.0 level. At this point, the market is likely to continue to see a lot of noisy behavior, but it appears that we are trying to go higher given enough time. If we do see the 50-day EMA break above the 200-day EMA, that’s the so-called “golden cross” that people look to for a bullish move to the outside. At that juncture, I would anticipate that the US dollar will more likely than not continue to try to go to the 5.6 BRL area.

Keep in mind that the Brazilian real is highly sensitive to soft commodities and risk appetite as it is a gateway currency for Latin America. If interest rates in the United States continue to rise, that should continue to put upward pressure on the US dollar against a lot of these emerging market currencies. When you look at the bigger “W pattern”, notice that the balance from the most recent part of the W is a bit higher than the one before it. In other words, the buyers became a bit more aggressive.

On a break higher, I think that the 5.4 BRL level could be a short-term target, but I do believe that we eventually hit the 5.6 level. I find it difficult to imagine that with the macroeconomic backdrop that we have, currencies like the Brazilian real will do well against the greenback. It’s not to say that we go straight up in the air forever, just that the world is short US dollars right now, as debt has suddenly become a concern, and of course with the Federal Reserve tightening monetary policy, it only makes more demand for less of a supply of dollars exacerbate the issue.