Bolsonaro Follows Through On Petrobras Warning

NEWS: President Jair Bolsonaro's decision to replace the head of Brazil's state-controlled oil company is the latest sign yet that the far-right leader is willing to sacrifice the market-friendly policies sponsored by his economy minister in a bid to boost his falling popularity. The President justified his actions by stating the current management showed "zero commitment to Brazil".

A sell-off in Petrobras SA is likely to deepen on Monday after a group of analysts downgraded the stock within 24 hours, following the government's decision to replace the company's CEO.

• This in turn, should have negative consequences for the Real, especially as high beta EM currencies remain under pressure throughout today's session. 5.50-5.52 continues to be the most important level of resistance.
• Additionally, DI Swap rates are also likely to extend their upward trajectory, following the shift higher last week.

Last week - The announcement on Friday of Covid Aid support of BRL250 for 4 months bolstered the Real. USDBRL closed near 1% lower at 5.3850. Joint headlines confirming the increase in indebtedness, kept pressure on rates with the DI swaps curve shifting higher by roughly 10 basis points.

We also noted some comments on the currency from president Bolsonaro. He said the currency depreciation in Brazil creates insecurity and alienates investors. If the dollar goes down, fuel prices are also likely to fall, he added. In his view, U.S. dollar is currently at a high level and should return to around 5 reais. The explicit mention stoked some BRL outperformance, very evident by BRLMXN closing up nearly 2%.

A few interesting revisions from an economist's survey released this morning:

• Brazil Economists Raise 2021 Selic Forecast to 4.00% Vs 3.75%
• Brazil economists forecast 3.82% 2021 inflation; prior 3.62%
• Brazil economists forecast 3.29% 2021 GDP; prior 3.43%