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Brazil: Finally showing some signs of resilience - BBH

FXStreet (Delhi) – Research Team at BBH, suggest that Brazil was likely oversold during the September panic that gripped most of EM but recent developments in both domestic and external, have helped Brazilian assets gain some traction, but it is a fragile balance and while the near-term looks more positive, the country’s fundamental problems and economic challenges are far from being resolved.

Key Quotes

“The rally in all assets over the last few sessions has been impressive; the question is whether it is sustainable. The move in local yields has been just as dramatic. Although we don’t discard the chance of a rate hike, the price action looked more to be panic-driven than anything else. We still think there may be some risk premium to be taken out, especially if the real remains under control.”

“We are less convinced about equity and FX markets. This is not so much a reflection of our own views on valuation, but rather that these markets are more susceptible to swings in global risk appetite and the broader dollar trend. As such, they offer a less precise way to express changes in the idiosyncratic variables that pertain to Brazil. That said, the step-up in FX intervention by the central bank (and the implicit threat of interventions in the spot markets) should help keep subsequent BRL selloffs in check.”

“The most important development is the cabinet changes. This increases the odds that the government will be able to implement its fiscal agenda, and it also reduces the chances of an impeachment process going through – at least in the short term. However, one casualty of the reshuffle could be Finance Minister Levy. This is a significant negative risk, in our view, even though his departure is not our base case.”

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