Higher fiscal and inflation risk likely to take USD/BRL up

It is just a matter of time until USD/BRL resumes its upward trend. Market patience should be tested in the weeks to come, as there has not been any improvement on the fiscal front in the past few months. Debt dynamics continue to deteriorate, as fiscal targets are not being met and revenues continue to fall. Investor confidence is practically nonexistent amid a lack of political will to address the situation rapidly. 

USD/BRL is targeted at 4.50 in the months ahead, due to higher fiscal and inflation risk premia, says Barclays.

In terms of data, Barclays expects IPCA inflation for October (Friday) to be 9.7% y/y, reflecting the adjustment in gasoline prices announced at the end of September and the acceleration of food group inflation, as shown in the IPCA-15 release for the same month. 

"The industrial production of Brazil will contract 1.7% m/m, following a 1.2% decrease in the previous month. The continued decline of business confidence, coupled with a 4.2% fall in auto production, drives our forecast", argues Barclays.