USD/BRL: Brazilian Real Gains 0.90% on Weak NFP Numbers

NFP numbers were weaker than the expected 243k at 175k. The Brazilian real strengthened after the release, as the market sees a September rate cut as ever more likely.

The unemployment rate rose to 3.9% from the previous 3.8%, and the average hourly earnings increased by 0.2% compared to 0.3% last month. This data also added to the bearish sentiment for the USD/BRL pair.

The change in sentiment for this FX pair is sharp, the market has declined 2.35% in just 2 trading sessions. Yesterday’s FOMC meeting and post-meeting conference kicked off the rout. What remains to be seen is how far the rally can go for the real.

The BCB (Brazilian Central Bank) will meet on May 8, for its scheduled monetary policy meeting. Expectations are for a cut of 50 basis points to 10.25%. The interest rate differential strongly favors the real making carry trades long real more attractive than long dollar.

However, if the real can keep rallying will probably depend more on the divergence of the two countries’ economies, as the carry trade becomes slightly less favorable. There’s no important data from the US before the BCB meeting.

So, most of the sentiment would come from Retail Sales data on the 8^th, and BCB’s Focus Market Readout on the 6^th. The report summarizes the central bank’s expectations on the economy.

Technical View

The day chart below for USD/BRL, shows an ongoing bull trend that may be about to continue the current correction. That correction should find strong support on the Ichimoku cloud, if it’s just a correction the market would continue to rally from there.

Today’s candle looks like it’s found resistance at 5.0544 (red line) a level that was set from a high on March 19. The level is particularly significant because it has been a pivoting point on many occasions in the past.

One indication that the bear correction may continue comes from the SuperTrend. Today’s candle is about to turn the trend line to red, which would indicate further downward price action.