Brazil's fiscal footing uncertainty complicates matters further

Uncertainty over the sustainability of Brazil's fiscal footing and the future of fiscal policy is complicating matters further. The fiscal dominance theory has returned to the spotlight in Brazil following the 31st August projection of a budget deficit in 2016. 

The downgrade to junk status by S&P on 9th September reinforced Brazil's fiscal woes and the downgrade from BBB to BBB- on October 15th by Fitch will also help play a role in ensuring policy makers are under even more pressure when drawing up the final budget law for 2016 (due before 22nd December). 

"Of course, if Moodys follow S&P into 'junk' territory then a mechanical impact will be seen driving BRL lower as investment grade only funds dump any remaining Brazilian debt", says Rabo Bank.