The USD/BRL has produced another round of head scratching trading results, as it finished yesterday near technical lows.

The USD/BRL traded near value last seen in the middle of June as it ended yesterday’s Forex session near the 5.0285 ratio. On the 25^th of August the USD/BRL currency pair found itself trading near the 5.1420 mark, but by Friday the USD/BRL actually started to decline in value. This came on the heels of the central bank policy speeches from the U.S in Jackson Hole which seemingly had little effect on the USD/BRL.

This weekend’s televised debate for President of Brazil also seemed to have little effect on the temperament of investment houses. The prospect of a left leaning political leader taking the realms of Brazil has not flustered the value of the USD/BRL as of yet. The election will be held on the first Sunday of October, and if a majority 50% plus winner is not produced the second round for President will be held the last Sunday of October. Technically the USD/BRL is hovering near very important support.

The 5.0000 Level is within Sight, but Support could prove to be lower

Speculatively the USD/BRL has produced a rather astonishing move lower while many other major currencies paired against the USD struggle to attain value.  The USD/BRL was trading near 5.5100 on the 21^st of July and has incrementally moved lower since then. However, it must be pointed out that on the 10^th of August the USD/BRL was trading near the 5.0400, but then moved higher and touched a ratio of nearly 5.2120 on the 19^th of August. However, the bearish trend is rather startling.

• Today’s opening in the USD/BRL should be monitored. If there is no gap upwards it could be a signal additional selling pressure could be demonstrated.
• If a gap higher is produced on the opening and the USD/BRL is suddenly testing the 5.0350 level, traders may believe it is an opportunity to look for quick hitting moves upwards.

The Strong Trajectory Lower in the USD/BRL Remains Suspicious but the Trend has been Durable

Speculators will have an opportunity to wager on the short term range of the USD/BRL, if it can remain within a calm range.  The opening should be watched for sudden potential gyrations. The USD/BRL continues to look like it has been overbought, but the trend which has been produced technically leaves little to argue, and if the 5.0000 were to prove vulnerable a move towards the 4.9700 level would not be a complete shock. Traders should look for quick hitting trades and have their risk management working today.

Brazilian Real Short Term Outlook:

Current Resistance:  5.0395

Current Support:  5.0157

High Target: 5.0796

Low Target:  4.9723

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I anticipate that we will go much further over the longer term, and you could even go so far as to draw a bit of a channel that we have been trading in as of late.

• The Brazilian real strengthened a bit against the US dollar as the dollar fell to the 5.27 level during the Friday session.
• There is still a significant support level underneath that should continue to elevate the US dollar, especially once you get closer to the 5.25 level.
• This is an area where we had broken out of previously, so we should see buyers coming in to pick this market.
• The Brazilian real is a commodity currency, which is going to be out of vogue in general right now.

Risk Appetite

This is especially true with the Brazilian real because unlike some other commodity currencies, it does not have the benefit of the developed nation status of places such as Canada, New Zealand, and Australia. In other words, people are much more comfortable investing in a place like Australia or in a business that is based in Québec than in South America. Risk appetite is something that favors the Brazilian real, but right now risk appetite is something that has been decimated.

Furthermore, the 50-day EMA is starting to rally a bit, and it looks like we are trying to get back to a “golden cross” when the 50-day EMA breaks above the 200-day EMA. Once that happens, the market is very likely to go looking to reach the 5.40 level again. Breaking above there then allows for the market to go higher, perhaps opening up the possibility of a move to the 5.60 level. Because of this, it’s likely that we will continue to see plenty of “buying on the dip”, especially as interest rates continue to rise in America. I anticipate that we will go much further over the longer term, and you could even go so far as to draw a bit of a channel that we have been trading in as of late.

When you look at the W pattern that we just broke out of, the “measured move” suggests that we are going to the 6.00 level. The 6.00 level is obviously a large, round, psychologically significant figure, and it’s likely that we see a bit of reaction to that area. If we were to break out from here, it’s not until we break below the 5.00 level that I would be concerned about the upside.

This is a market in that I think we will continue to see a lot of noisy volatility.

The US dollar rallied significantly on Tuesday to show strength yet again against emerging market currencies, in this case, the Brazilian real. The market is currently breaking above the 5.39 level and threatening the 5.40 area. This is a market where the trend is most decidedly to the upside, now that we have broken above a massive “W pattern.” This “W pattern” is a bullish sign, and if you remember the last time that I covered this pair, I had suggested that the recent pullback had been much shallower than the one before it, so it does suggest that we are getting ready to go higher. We have seen that happen already, and now it looks like we are getting ready to go toward the 5.70 level.

The 200-day EMA sits just below the 5.20 level and is rising. In other words, this is an area that should be supported, perhaps even defining the trend in general. That being said, the market is likely to continue to find plenty of buyers, and I think that we will continue the uptrend over the longer term. After all, the market is going to favor the US dollar when we have a lot of uncertainty when it comes to the overall flow of money, and of course the lack of growth around the world. After all, Brazil is a commodity economy, and commodities have an outsized effect on the BRL.

The US dollar has been strong against almost everything and you need to pay close attention to these emerging market currencies, because they can give you a bit of a “heads up” as to where we may be heading over the longer term. With this in mind, it looks like the US dollar is going to continue to strengthen, and I think we probably have plenty of runway to the upside.

If we were to break down below the 5.10 level, then we will threaten the 5.00 level, which is the “bottom of the market.” If we were to break down below there, then it would be a massive turnaround in this marketplace. Ultimately, this is a market in that I think we will continue to see a lot of noisy volatility.

I find it difficult to imagine that with the macroeconomic backdrop that we have, currencies like the Brazilian real will do well against the greenback.

On Wednesday, the US dollar pulled back against the Brazilian real as a reaction to the recent breakout. It now appears that the 5.2 BRL level should offer support, as it was previous resistance. We have finished a “W pattern”, so it will be interesting to see whether or not we can find the necessary momentum to go higher. At this point, it looks as if we are going to check this area for a potential springboard higher, but we need to break above the 5.27 level to confirm that.

If we do fall from here, the 200-day EMA is at the 5.13 level and rising, just as the 50-day EMA is breaking above the 5.0 level. At this point, the market is likely to continue to see a lot of noisy behavior, but it appears that we are trying to go higher given enough time. If we do see the 50-day EMA break above the 200-day EMA, that’s the so-called “golden cross” that people look to for a bullish move to the outside. At that juncture, I would anticipate that the US dollar will more likely than not continue to try to go to the 5.6 BRL area.

Keep in mind that the Brazilian real is highly sensitive to soft commodities and risk appetite as it is a gateway currency for Latin America. If interest rates in the United States continue to rise, that should continue to put upward pressure on the US dollar against a lot of these emerging market currencies. When you look at the bigger “W pattern”, notice that the balance from the most recent part of the W is a bit higher than the one before it. In other words, the buyers became a bit more aggressive.

On a break higher, I think that the 5.4 BRL level could be a short-term target, but I do believe that we eventually hit the 5.6 level. I find it difficult to imagine that with the macroeconomic backdrop that we have, currencies like the Brazilian real will do well against the greenback. It’s not to say that we go straight up in the air forever, just that the world is short US dollars right now, as debt has suddenly become a concern, and of course with the Federal Reserve tightening monetary policy, it only makes more demand for less of a supply of dollars exacerbate the issue.

Fading short-term rallies will more than likely continue to be the best way going forward, as we will have plenty of supply above at this point.

The US dollar fell against the Brazilian real on Tuesday as we have broken below the 5.00 BRL level. That being said, the Brazilian real is a little bit different than most other currencies against the greenback, because higher interest rates in Latin America and the reopening of trade in the region have been very strong. Furthermore, soft commodities continue to strengthen so it takes quite a bit of momentum into the currency.

At this point, the market is threatening to break significantly below the 50-day EMA, and if it does, then it is likely that we would go to the 4.80 level, maybe even the 4.60 level after that. The candlestick is rather negative looking, and the fact that we ended up forming a shooting star right at the 200-day EMA several sessions ago suggests that we have pulled back quite nicely, and found enough of a reason to continue the overall downtrend. Ultimately, this is a market that would have to pull some type of Herculean effort to turn things around. If we were to break above the 200-day EMA, then it is a very bullish sign, and it could open up the possibility of the US dollar screaming higher. However, we would probably need to see some type of commodity selloff when it comes to food, something that does not look likely to happen anytime soon.

Fading short-term rallies will more than likely continue to be the best way going forward, as we will have plenty of supply above at this point. That being said, keep in mind that the global slowdown could come into the picture, so I would anticipate that we would have a lot of concern every time we do get a little too out-of-control in one direction or the other, so keep your position size reasonable but recognize that the Brazilian real does tend to trade in long trending patterns, so I am much more comfortable shorting that I am buying. If we do break above the 200-day EMA, then I will slowly build a position, not necessarily jump “all in” right away. The market breaking below the 4.50 level could be a runaway trade, but right now we are nowhere near doing that.

Ultimately, volatility is the only thing that I see over the next couple of days.

The US dollar initially fell on Friday but turned around to show signs of life as it formed a hammer. The hammer sits at the 50-day EMA, and it looks as if we are going to try to break higher at this point to go looking to the 5.00 BRL level. The fact that we have formed a hammer and a shooting star back to back suggests that we are going to try to keep it in a tight consolidation area. Furthermore, we will more likely than not get some type of breakout that we can take advantage of.

Once we break out of this range, it is likely that we could go much higher, or perhaps much lower. If we do break out to the upside, the 5.15 level could be a target. On the other hand, if we were to turn around a breakdown below the hammer from the session on Friday, as likely that we go looking to the 4.80 level after that.

Keep in mind that the US dollar is sensitive to risk appetite, and as a result, you need to pay close attention to whether or not the US dollar is rising against everything or not. After all, the US dollar does tend to move in the same direction in multiple markets, so I don’t think that the Brazilian real is going to be any different. This is a market that is building up inertia in order to make the next bigger move. Keep in mind that risk appetite is highly influential when it comes to emerging market currencies such as the Brazilian real.

The Brazilian real also is highly sensitive to commodities, and we have seen a lot of noise as of late when it comes to the soft. As long as that is going to be the case, we will be all over the place. Furthermore, the Federal Reserve looks as if it is going to continue to be very hawkish, and that suggests that we could continue to see the US dollar recover some of its losses from the higher-yielding Brazilian currency. If we can break above the 5.15 level, we could really start to take off to the upside. Ultimately, volatility is the only thing that I see over the next couple of days.