BCB to hold Selic rate

Bad news kept coming last week, as Fitch downgraded Brazil's sovereign rating to BBB- with a negative outlook. The political gridlock continues, with the presidential vetoes on amendments to fiscal consolidation bills likely to be voted by Congress in November, as the bargaining between the executive and the legislative continues. The negative loop between weak economic activity, political crisis and lack of structural reform is likely to continue for months to come. This week, the BCB is in the spotlight, as Copom meets on Wednesday. 

It is expected to keep the Selic rate at 14.25%, in line with the consensus. The central bank is between a rock and a hard place, as the sell-off of Brazilian assets and the accompanying BRL depreciation has pushed inflation expectations upwards while economic activity is worsening and the recession deepening. 

"With risk premia poised to increase further in the months to come, we hold our recommendation of being long USDBRL via options and a NTN-F curve steepener", says Barclays.

Data this week should confirm the acceleration of inflation, as October's IPCA is released on Wednesday. A monthly increase of 0.70% is expected, above the consensus (0.68%). Finally, September's unemployment data are released on Thursday. The deteriorating economic activity should push the unemployment rate upwards, with the consensus expecting 7.8% (from 7.6% last month).