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Poor NFP, trade balance data turns the Greenback weak

In mid-May, the Brazilian Rial plunged against the Greenback when a local newspaper reported that President Michel Temer asked Joesley Batista, chairman of the meatpacking giant JBS SA, to continue paying former legislator Eduardo Cunha, who is currently serving a prison sentence for money laundering and corruption.

The news created doubts about the ability of the Brazil’s government to implement key economic reforms.

That bolstered the USD/BRL to a high of 3.4068, from the prior close of 3.1254.

However, as explained underneath, the recent economic data indicates that the Brazilian economy is making a comeback. Thus, we are bearish on the USD/BRL currency pair.

Financial Times

For the first time in two years, boosted by a strong rise in exports, the Brazilian economy expanded by 1% q-o-q in the first three months of 2017. The GDP growth was in line with expectations. In the previous quarter, the economy contracted by a downwardly revised 0.5%.

Brazil also posted a record trade surplus of $7.66 billion in May, up 19% from $6.437 billion last year, and in line with analysts' estimates. Record harvest of soy contributed mainly to the trade surplus. In the first five months, Brazil recorded a trade surplus of $29 billion.

On the other hand, the US Bureau of Economic Analysis reported a trade deficit that widened to $47.6 billion in April, from $45.3 billion in the earlier month. On average, analysts expected trade deficit of $45.5 billion.

Notably, on Friday, the US Bureau of Labor Statistics reported that the economy had added 138,000 non-farm jobs in May, down from 174,000 jobs in the previous month, and lower than Consensus estimates of 181,000. Similarly, the average hourly wages increased only 0.2% m-o- m in May. The non-farm payrolls (NFP) report has raised doubts about the possibility of the Fed’s plan to raise benchmark interest rates thrice this year. Thus, economic data supports a correction in the USD/BRL pair in the short-term.

The USD/BRL pair has broken the resistance level of 3.2810, as shown in the chart below. The DeMarker oscillator is declining after reaching a reading of 0.7. That indicates exhaustion in the USD/BRL pair. Thus, we can expect the pair to cover the technical price gap soon.

USD/BRL Pair: June 5th 2017

USD/BRL Pair: June 5th 2017

We prefer to trade the impending downtrend by going short in the USD/BRL pair at 3.2520 levels. To attain a comfortable risk-reward ratio, a stop loss order would be placed above 3.2810. We plan to book profit near 3.1300, which is a major support level.

In our binary broker’s trading platform, we may purchase a put option contract to earn from the USD/BRL pair’s probable decline. We would invest in the option when the pair trades near 3.2520. Finally, we prefer a contract which expires in a week.


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