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BRL Weakness Has Been Weighing On Domestic Equities

BRAZIL
  • The firm momentum on the US Dollar since June has been weighing on a range of EM FX currencies, particularly the BRL.
  • The BRL has been the third weakest performer this month (after TRY and HUF) among the EM world, down nearly 5% against the USD.
  • Even though the BCB has embarked into an 'aggressive' tightening cycle, raising the Selic rate by 425bps this year, the elevated political uncertainty combined with the rising inflationary pressures (CPI inflation close to 10% in Brazil) have been weighing significantly on the real.
  • This chart shows that the BRL weakness has also been negative for equities, with Ibovespa index down over 15% since its June peak.
  • Hence, further USD strength as the Fed taper nears could continue to weigh on Brazilian risky assets in the near term.

Source: Bloomberg/MNI

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