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BRL Gaps Lower Amid Latest PEC Proposal

BRAZIL
  • Brazil President-elect Luiz Inacio Lula da Silva will ask congress to circumvent a key fiscal safeguard by excluding the country’s most important social program from a public spending cap to pay for his campaign pledges. The PEC proposal appears to assume the removal of 175B reais, which is certainly higher than the ‘more conservative’ reports from Bloomberg on Monday that saw them weighing just a 130B removal from the cap.
  • Additionally, as part of that report, it seemed that the proposal would only be for one year, however, the new proposal looks to be open-ended which is likely to exacerbate short-term uncertainties. Some analysts expect this timeframe to be watered down to potentially a four-year period to meet the opposition halfway, however, there has been significant pressure on the local currency at the open.
    • USDBRL has now breached key short-term resistance at 5.4286, the Sep 29 high, altering the previously held bearish technical outlook. 5.5142, the Jul 21 high has also been exposed which represents a medium-term bull trigger.
  • It seems there may be a lack of consensus within the transition team as well regarding the latest developments –-- When asked if former central banker Persio Arida, Alckmin’s most important economist in the transition team, agreed with the proposal, Senator-elect Wellington Dias, who’s negotiating with congress on behalf of Lula, just replied that he is “following the discussions.”
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