Mr. Win Thin writes:
BRL is one of the worst EM performers today, and continues a string of underperformance (-10.8% vs. USD) that began with the unexpected 50 bp rate cut August 31. Since then, only HUF has done worse at -11.5%. It’s really a confluence of factors, but markets are clearly punishing Brazil for its continued efforts to weaken the currency, which have distorted markets there. Besides the countless FX measures, of which Friday’s was only the latest in a long line of poorly communicated policy shifts, we are now seeing even more distortions added into the economy with the imposition of import tariffs to help protect domestic manufacturers. Not only is this inefficient from pure trade theory, but it will also likely add to already high price pressures.
The weekly central bank survey shows continued deterioration in inflation expectations, with all measures creeping higher. A weaker BRL and higher import tariffs will end up injecting more inflation into the economy, and we can see this thing really going off the rails if inflation gets out of hand. Lower nominal yields plus higher inflation will not instill investor with confidence, and will most likely lead to higher borrowing costs for the government. Mid-September IPCA is due out tomorrow, and market is looking for an acceleration in the y/y rate to 7.29% from 7.1% in mid-August. This is well above the 2.5-6.5% target range.
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