Case for going short Brazilian real

Go short the Brazilian real says Daniel Tenengauzer, head of EM & Global FX strategy at RBC Capital Markets.

The bank has just entered a three-week option position - priced when the dollar rate was about Brl3.126 - designed to benefit should the real suffer from a fresh bout of nerves related to some longstanding themes.

First problem, says Mr Tenengauzer, is this weekend's planned street demonstrations against President Dilma Rousseff.

"Assuming as many turn out to the streets [as did in March] this Sunday may imply a strong support to the initiation of an impeachment process. We continue to have a 20 per cent probability to this scenario."

Linked to this is the Petrobras scandal. The deadline, April 30, for the publication of the company's audited balance sheet and net income report is approaching. Meanwhile, investor lawsuits regarding the energy group's alleged corruption are proliferating.

Finally, the Brazilian central bank (BCB) "has communicated that it is comfortable with the present exchange rate level", RBC notes.

And though the BCB is likely to raise rates at its policy meeting on April 29, it is "highly likely to change the pace of monetary tightening" by delivering just a 25 basis point rise and ending the cycle at 13 per cent.

Rate cuts could follow in the second half of the year, pressuring the real.

It is also worth noting that the real's 14-day relative strength index, which had moved deep into oversold territory in mid March, is now back on neutral ground around the 50 mark.

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