BRL: Limited Room For Significant Appreciation

After testing the crucial BRL1.7000/US$ technical level in November, the Brazilian real has struggled to remain on its impressive appreciatory course, which has seen the unit rally some 33% against the dollar in 2009. Indeed, having failed to break resistance around this area, we now see scope for further short-term weakness, with a bounce back towards BRL1.8000/US$ looking increasingly likely. The daily chart suggests to us that the real will now have to take out key technical resistance around the BRL1.7400/US$ mark before regaining the necessary bullish momentum to re-test the BRL1.7000/US$ level going forward. Fundamentally, we also believe that near-term upside for the unit will be restricted by strong policy overtones to stem the further rise of the real.

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