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Positive policy shock announcement expected in Brazil regardless of election result - RBS

FXStreet (Łódź) - The RBS team of analysts present their view on the Brazilian general election, scheduled for October 5, and the possible implications.

Key quotes

"By positive policy shock we mean the announcement of clear and measurable medium-term fiscal targets, recommitment to an explicit inflation target on the part of the BCB and a strategy for the gradual normalization of administered prices including that for electricity, oil and subsidized credit (the latter is already taking place with some of the state-owned banks in Brazil slowing raising their lending rates to meet those of private sector banks)."

"We view this as the only way to stabilize Brazilian asset prices and ward off a ratings downgrade especially in a scenario of a second term for Dilma Rousseff."

"Brazil's growth x inflation balance should deteriorate with any adjustment, even a positive one."

"Appointments to key government positions, primarily the Finance Ministry and Central Bank, will be the key to gaining market confidence quickly after the elections."

"The BCB will have a big role in FX during this adjustment process and as always, it has the tools."

"Should Dilma Rousseff win the elections, it will be a greater challenge for the BCB to ensure a stable currency without greatly expanding its derivatives exposure."

"A Dilma Rousseff victory will provide the best entry points to trade a positive policy shock scenario. Market reaction to the polls thus far suggest that USDBRL cross could overshoot quickly in a scenario where Dilma Rousseff wins."

"With the market so one sided, there is also the risk of a sharp undershooting of USDBRL cross should the opposition win."

"Lower FX range with opposition victory, but not too much appreciation."

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