Fitch downgrades Brazil to junk and maintains a negative outlook. Brazil has now lost its investment grade status by two of the major rating agencies after Standard & Poor's cut the rating to junk earlier this year.

Fitch took its decision due to deeper than expected recession, a deteriorating fiscal outlook and increasing political uncertainties in Brazil.

GDP for the third quarter showed the recession has yet not bottomed, as economic activity contracted by a deeper-than-expected -1.7% q/q. The GDP print for Q2 was also revised lower to -2.1% q/q. Investments and private consumption have continued to contract.

"We expect them to continue to remain subdued in the quarters ahead as higher rates, the incipient weakening of the labour market, low confidence and worsened terms of trades are pulling the break on activity. We recently revised down our growth forecast to -3.7% for 2015 and -2.4% for 2016", says Nordea Bank.

The recession has also deepened the challenges for the government in addressing the primary fiscal deficit and the growing debt burden. Difficulties for the government in getting any meaningful fiscal reforms passed through Congress and increasing political uncertainties due to, among other things, the initiated impeachment proceedings against the President Rousseff, imply an increased risk of a further delay of the implementation of necessary reforms.

There are speculation that the government is considering to lower its fiscal target for 2016 to 0.5% of GDP from the current fiscal target of 0.7%. Finance minister Levy has been opposing a further lowering of the fiscal targets, and could possibly resign if this happens, something that would be negatively received by investors as he is seen as very credible.

"We expect markets to focus on the economic and fiscal outlook, which will leave the BRL very vulnerable ahead of any further negative news. Our 3-month forecast for the USD/BRL is at 3.9, but the risks are to the upside, and we might revise our forecast", added Nordea Bank.