Upcoming Fed hikes may keep BRL under pressure

The deep economic downturn in Brazil, and difficulties in reaching support in Congress to pass through any meaningful fiscal reforms has impaired the government's efforts in reaching fiscal consolidation and reining in the growing government debt stock. It looks highly unlikely at the moment that the government will be able to reach its much lower and weaker fiscal targets of 0.7% respectively 1.3% of GDP for 2016 and 2017, foresees Nordea Bank. 

Fitch expects the economic and fiscal underperformance to persist, and therefore keeps the outlook on negative. Factors that could lead to a downgrade into junk are further growth-underperformance or difficulties in reaching fiscal consolidation and continued political risks undermining policy-making.

Weak domestic fundamentals, the risk of more rating downgrades, pressure from the drop in commodity prices and the upcoming Fed hikes is likely to keep the BRL under pressure. 

"We recently revised our 3M and 6M forecast for USD/BRL to 4.1 and 4.00. We see very moderate strengthening beyond the near term as external pressure eases, but domestic issues persist", estimates Nordea Bank.