Renewed Fiscal Pressure Impacts USDBRL

Notable USDBRL strength now up just under 1% on the day. The pick-up in Covid cases and the subsequent tightening of restrictions announced in Sao Paulo have certainly soured the mood on the currency front.

• Brazil's congress ended the year without voting on a bill that would increase federal payments to cities at an annual cost of 4 billion Reais. Although the approval of this constitutional amendment is uncertain for now, analysts have reinforced their calls that total public spending will surpass the limit imposed by the spending Cap in 2021.
• Furthermore, the announcement today that the Finance Ministry is readying more stimulus in case of lockdowns emphasises the uncertainty over the fiscal trajectory.
• The uncertainty explains the BRL divergence from its LatAm peers and the contrary performance to the broader softer US dollar.
• DI Swap rates remain lower, potentially due to the slightly lower inflation figures, easing pressures on the central bank to remove their forward guidance.
• Local brokers and traders are reporting a significant decline in market volume today both on DIs and FX as B# exchange will be closed Dec. 24 and Dec. 25