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Local Assets Face Severe Pressure As Fiscal Headwinds Resurface

BRAZIL
  • While markets had been keen to hear the latest appointments to the central bank at Finance Minister Haddad’s surprise press conference today, the more significant development for markets were Haddads comments on tax revenues and the overall fiscal scenario.
  • Haddad acknowledged that the fiscal scenario had become increasingly “challenging” but blamed Brazil’s congress and Supreme Court, stating that the President had expressed scepticism after hearing about the impact of tax benefits resulting from legislation and judicial rulings that have hurt federal revenue estimates and put the zero-deficit goal at risk.
  • Swap-rate contracts due in January 2026 surged as much as 44 basis points after the remarks and remain 30bps up on the session as we approach the close. In similar vein, USDBRL rose the best part of 1%, extending the bounce from Friday’s lows of 4.9315 to 5.05 at typing.
  • Industrial production and trade balance data will cross this week before the Copom decision. Analysts unanimously expect the BCB to maintain the 50bp easing pace, while markets will try and decipher the statement for clues on whether this pace may be adjusted at coming meetings.
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