Brazil's BCB meeting could surprise with rate hike

Later this evening BCB will announce whether or not it will raise interest rates. Consensus expectations among analysts are for rates to remain on hold at 14.25%, notes Commerzbank. However, market expectations and those of analysts are beginning to diverge. In recent weeks markets had even started to price in an easing cycle. Front end 2 Yr. swaps fell as low as 13.55%, before surging higher towards levels around 14.25% (at the time of writing). 

Clearly, recent developments led market participants to wonder whether BCB would be able to cut rates to any material extent. Worsening sentiment towards emerging markets means that BCB may actually be forced to increase rates in order to defend BRL and guarantee continued financing for the current account deficit. In any case markets are voting with their feet and selling BRL aggressively. USD-BRL continues to trade at its highest level in a decade and no reason is seen to stop this anytime soon, argues Commerzbank.