UBS analysts identified several factors that may provide a positive outlook for the Brazilian Real (BRL), despite acknowledging the currency’s challenging journey ahead. The firm noted that the carry for the BRL has doubled over the last six months and is nearing levels that could stabilize the currency. Additionally, 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 a strong agricultural output in the first quarter of the year. These factors, combined with the stabilization of additional pressures that weighed on the BRL towards the end of 2024, including unusually high outflows due to dividend payments and a reevaluation of the Federal Reserve’s hawkish stance, could offer some support to the Real.
In contrast, the Mexican Peso (MXN) is facing different circumstances, with UBS noting that it is pricing in very little foreign exchange premia. The Central Bank of Mexico (Banxico) seems ready to cut rates, which could impact the Peso. Furthermore, Mexico faces exposure to potential U.S. tariff and policy risks.
On the data front, UBS reported mid-January inflation figures for Mexico at -0.02% month-over-month, equating to an annual rate of 4.36%. While inflation is expected to slow in January due to electricity price discounts, UBS anticipates an acceleration in February, with estimated inflation between 1.2% and 1.3% month-over-month. The analysis by UBS provides a detailed outlook on the potential economic indicators that may influence the BRL and MXN in the near term.
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