USD/BRL: Interest Rate Hikes Cause Short-Term Price Action

Robert Petrucci

The USD/BRL moved lower in trading yesterday and is near interesting short-term support levels after the Brazilian central bank increased interest rates.

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The USD/BRL traded lower when the Brazilian central bank hiked interest rates with a bold splash yesterday and indicated it may remain hawkish in the mid-term. The USD/BRL closed the trading day near the 5.5370 level with downward movement certainly being displayed. However, the move lower was not wild and the USD/BRL did not see a vast sea of volatility yesterday.

In fact, the big move downwards occurred on the 22nd of October before going into the weekend; the USD/BRL went from approximately 5.7500 to 5.6200 on Friday. When trading opened early this week, the USD/BRL again saw some movement downwards and, interestingly, on Monday a low of 5.5300 was essentially made, which happens to match the current price of the Brazilian real remarkably well.

The move lower before the weekend started could lead technical traders to suspect that large financial institutions may have wagered on the interest rate hike to come. The core interest rate of Brazil is now at 7.75% and it has been suggested other hikes may be seen in the coming months. Yesterday’s high for the USD/BRL was near 5.6000 and the selloff in the USD/BRL can be considered as a logical direction based on Brazil’s central bank decision.

As short-term support is clearly in view early today, speculators may believe the USD/BRL will logically continue to see additional bearish momentum develop. However, experienced technical traders know that there tends to be a bit of a contrarian reaction after changes to interest rates, which means aggressive market participants may actually be anticipating a reversal higher when trading begins for the USD/BRL. Traders are cautioned to be careful when the Brazilian real opens today and they might want to sit out the first hour or two as the USD/BRL looks for equilibrium.

Speculators who want to remain sellers and believe the 5.5000 support area will be a target cannot be blamed, but they should have their stop losses working as protection. If the important 5.5000 level proves vulnerable as the day develops, speculators may believe the 5.4800 to 5.4600 support ratios are a justifiable goal. Because of yesterday’s interest rate hike in Brazil, traders should be prepared for the potential of swift moving values.

Brazilian Real Short-Term Outlook

Current Resistance:  5.5960

Current Support:  5.5050

High Target: 5.6600

Low Target:  5.4600

USD/BRL Chart

Robert Petrucci
Robert Petrucci has worked in the Forex, commodity, and financial profession since 1993. Important aspects of his work involve risk analysis and advisory services. As an advisor in a Family Office he maintains a conservative approach for wealth management and investments. Robert also works in private finance with investors and companies delivering financial and management services.

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