The rise in the currency has been driven by a number of factors. Firstly, we have the weakening of the US dollar and a concomitant rise in commodity prices. Expectations of a move in interest rates by the US Federal Reserve have been one of the driving factors of market moves over the past year, but in recent weeks the American central bank had begun to turn dovish (that is the governing committee was looking to ease policy).
It is likely that the Brexit vote – the UK’s decision to leave the European Union – will only accelerate this move. Developed market central banks (e.g. the Fed, European Central Bank, Bank of Japan and Bank of England) have all shifted positions of late, looking to boost their economies through easing. As a result, emerging market economies have seen a degree of strength as money flows back to areas such as Brazil that offer a better yield.
In addition, Brazilian assets have become much more popular this year, based on the idea that acting president Michel Temer, who took over from Dilma Rousseff after the latter was impeached in December and then suspended in May 2016, would begin to enact fiscal policies designed to bring Brazil out of its worst recession in a century. So far there is not much sign of these measures, but for now the mere hope of a change in policy, combined with weakness in developing markets and the changing expectations for Fed tightening, have helped to drive the real higher.
Having risen by around 18% so far this year against the US dollar (as of 6 July), the question now is whether there is more to come or whether the rally has run its course. The rally has seen a rush of upgrades to forecasts by investment banking analysts, but this is more a function of hindsight rather than a concrete expectation of more to come.