The BCB reportedly stepped into the FX market last week with a spot sale of dollars that was not accompanied by a repurchase commitment or other intervention measures – the first time this has happened in a decade. The move to stem the slide in the BRL has been relatively modest so far, but pressure on the BCB to intervene further is likely to mount.

While lower dollar rates in the US would be expected to ease pressure on high yield FX, in Brazil’s case the spread of real policy rates over the US has now narrowed towards record lows, providing a limited carry buffer. In addition, Brazil’s debt dynamics have become de-anchored with a persistent primary budget deficit being compounded by weak economic growth and a comparative high cost of borrowing. According to BIS data, Brazilian government debt has soared by 30% points over the last five years to 87% of GDP. Finally, the disastrous handling of the Amazon rainforest fires could prove destabilising for the Bolsonaro government and inject fresh political instability to the current situation.

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Source: Bloomberg, Macrobond, Variant Perception