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Sacha Tihanyi, Deputy Head of Emerging Markets Strategy at TDS, suggests that while the change in the external environment and hedging pressures have made matters worse for Brazil, they do not attribute the rise in US yields or the USD as the main macro driver behind higher Brazilian yields or BRL weakness.

Key Quotes

“We observe the slowing growth recovery and negative growth shock implied by the trucker’s strike to be generating a re-expansion in Brazil’s fiscal risk premium, constituting the key fundamental drag on Brazilian risk assets.”

“We see the BCB on hold for now and do not expect a response to FX weakness with interest rate policy at current levels in USDBRL, though a hawkish tone shift is likely.”

“We view the market’s aggressive pricing of rate hikes this year as unlikely to be realized, as it places too much weight on inflation risk and not enough on the output gap.”