The Brazilian real sold off against the US dollar as the greenback hit 5.5 BRL during the trading session on Monday. At this point, it looks very much like a market that is trying to build up enough momentum to go much higher. Ultimately, this is a market that is going to be interesting to watch due to the fact that the US dollar is considered to be a safety currency, while the Brazilian real is a play on risk appetite.
As interest rates rise in America, it does a lot of damage to emerging market economies, Brazil included. Ultimately, this is a market that I think continues to plow higher but there is a lot of resistance just above. This is especially true near the 5.57 BRL level, where we had seen a plunge previously, and of course the 50 day EMA. With all that technical resistance, the Brazilian real may be a bit difficult for the US dollar to overtake, but it is also worth noting that we had bounced from the crucial 200 day EMA. This has attracted a lot of attention, right along with the fact that it was at the 50% Fibonacci retracement level from the double top.
Pay close attention to risk appetite around the world, because it will have a major influence on what happens with the greenback and smaller currencies such as the Brazilian real. Another way that you can play the market is to pay close attention to other emerging market currencies such as the South African rand, Indian rupee, and Philippine peso. They all tend to move in the same general direction, so if the greenback is rising against those currencies, it is very likely that it will be rising against this one.
The next day or two might be interesting due to the fact that the FOMC meeting is on Wednesday and there is a statement/press conference afterward that has a lot to do with where we go next. If inflation expectations are pretty high, and if they sound overly hawkish, that could really start to send the US dollar much higher. At this point, we would probably see all emerging market currencies get crushed. However, if Jerome Powell surprises with a slightly less hawkish tone, that could cause this market to retest the 200 day EMA.
