FXStreet (Delhi) – Research Team at TDS, notes that even though the Brazilian real is recovering from a thirteen-year low of 3.9061 on September 10, following a kneejerk reaction to the S&P downgrade to junk that shocked markets last week. A further correction in USDBRL is possible in the coming days, but will strongly hinge on a favourable combination of local and external factors.
Key Quotes
“In the specific case of Brazil, however, we remain reluctant to the idea that any Fed decision will bear lasting consequences on Brazilian asset pricing. Rate differentials are extremely wide, so much so that any Fed hike should be meaningless.”
“On the local front, the situation is possibly even more complicated, but big moves will all stem from developments here. Politics remains extremely fluid, as shown by headlines last week and the one before signalling a possibility of Finance Minister Joaquim Levy leaving the cabinet on disagreement with President Rousseff or given the obstructionism of Congress jeopardizing any attempt to deliver fiscal consolidation.”
“On these heightened risks, S&P decided to cut Brazil’s foreign-currency long-term debt ratings to BB+ (junk) from BBB- (investment grade) on September 9. The decision was a shock as the outlook was changed to negative only on July 28, so less than two months earlier. It usually takes 12-18 months to resolve an outlook, and sometimes longer.”
“However, the gravity of the situation has prompted S&P to an early move and the affirmation of the negative outlook also reiterates that there’s “a greater than one-in-three likelihood of a further downgrade”.”
(Market News Provided by FXstreet)