
Brazil: BRL and Assets to Remain Supported on Pro-Impeachment Vote - TDS

Brazil: BRL and Assets to Remain Supported on Pro-Impeachment Vote - TDS
Sacha Tihanyi, Senior EM Strategist at TDS, explains that they are
hesitant to take long position at current level and would prefer to sell
it on a medium to longer term basis above 3.80.
Key Quotes:
“We expect Brazilian assets to remain supported on a proimpeachment vote, and while there remains upside
potential for BRL, bonds, and lower sovereign risk premiums, valuations are increasingly pricing-in too great a
certainty of a very optimal outcome.”
“The
Bovespa looks particularly ‘hot’ given that it has rallied back more
than 7% further than its June through January selloff. BRL, government
bond yields, and sovereign risk (CDS) have rallied and retraced
substantially (CDS the least), but these three assets still look less
exposed than equities. Nevertheless, there remains scope for further
optimism to be priced-in relative to the current rally if one decides to
trade tactically the headlines and probability of impeachment given
evident pro-impeachment momentum.”
“We are well through our end
of year target for USDBRL at 3.70, which leaves us very hesitant to take
strategic long positions until we get a sufficient pullback, and would
prefer to sell USDBRL on a medium to longer term basis above 3.80,
barring any complications to our base case of impeachment. The increased
aggressiveness of the central bank in the reverse FX swaps market has
shown that policy makers are not overly comfortable with USDBRL trading
below the 3.60 level.”
“We do note that our current end of year
forecast will be nullified and changed much more BRL-bearish if we see
Rousseff avoid actual impeachment, or assign a high probability that a
substantial fiscal will be thwarted.”