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Political chaos is the last thing Brazil needs during economic hard times, but political chaos is what Brazil has. On Friday, former President Lula was arrested as part of an on-going Petrobras corruption investigation. And President Dilma Rousseff had a nasty shock when the head of her party and his wife admitted to taking bribes.
Brazil's GDP is expected to contract 3.5% in 2016 and inflation has hit almost 11%. With the country struggling to contain the Zika virus, and a political scandal threatening to bring down the government, it's hard to see how Brazil can engage in any meaningful reforms.
BRL on Friday rallied strongly following the revelation of Lula's arrest. It's noteworthy that Credit Default Swap prices collapsed in the wake of the revelation which implicitly means that markets think there is a lower chance of default if the current administration finally depart.
"The only question is will they leave the new administration with enough time to correct the fiscal deficit?" notes Commerzbank in a report.
