BRL to underperform its EM peers

The deterioration of the economic and political situation in Brazil will weigh heavily on BRL, which is expected to underperform its EM peers. The executive's inability to have approved the economic reforms necessary to balance the fiscal accounts will keep risk premia high, increasing the funding cost of businesses and hurting capital expenditure. Depressed investment will be detrimental to potential output, and lower structural growth, together with fiscal looseness and political distress, will make it very hard to stabilize the debt-toGDP ratio in the near future. 

On the other hand, the central bank faces the challenge of supporting economic activity in an environment of high inflation and unanchored expectations. 

"We believe the extent of the ongoing recession will induce the central bank to reduce its rates at some point in 2016 below market consensus. As such, we expect USDBRL to hit 4.20 by year-end and 4.50 one year ahead", says Barclays.