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Brazil: Heading towards economic meltdown – TDS

FXStreet (Delhi) – Cristian Maggio, Head of Emerging Markets Strategy at TD Securities, notes that the BRL gave up another 3.1% vs $ in the worst single-day move since 2011 and very few signs suggest that today will be better than yesterday.

Key Quotes

“First of all, the BRL problem seems to be more local than external. Liquidity may dry out as local dollar buyers keep hoarding FX on fears that the collapse will continue. It’s not just a matter of liquidity, however, as the general sentiment on Brazil’s macro and political picture remains bleak, to say the least.”

“The BCB intervened yesterday, announcing auctions for FX credit lines worth $2bn then adding another $2bn, and also auctioning 20,000 FX swap contracts worth up to ca. $1bn, but placed only 4,400 worth $210m, which shows that, despite everything, there is not that great demand of USD liquidity at the moment.”

“But the only way for Brazil to navigate out of the storm is to provide an adequate level of liquidity and hedging tools to locals, while the government must fix the fiscal deficit swiftly and credibly.”

“It may also be necessary to increase interest rates again. The market is now implying +310bp by July 2016, yesterday evening it was +250bp, yesterday morning before Brazil open it was +225bp. So the speed at which implied expectations are changing is also a source of huge concern as it highlights the situation is almost out of control and local players have entered emergency mode already.”

“In this respect, monetary tightening - and possibly in big size - is back on the table for October if not earlier. Today's Quarterly Inflation Report will be the first piece of hard evidence that we are moving in that direction. If the BCB revises the CPI projections to the upside, take that as a half yes to the question 'will they hike at the next meeting?'. If the upside revision is significant, take that as a full yes!”

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