Brazil: More volatility as hiking cycle ends and ratings outlook deteriorates

A worsening in the sovereign's external outlook should imply a weaker currency and a higher tolerance for heightened inflation in an environment in which Brazil's growth picture looks uncertain. 

"We read the recent COPOM statement as suggesting that it has concluded its hiking cycle and we expect it to switch to cuts by March 2016," says Barclays.

The flatness in the belly of the curve can be explained only by a central bank that is way ahead the curve and the next move is a rate cut. Outright receiver 2-3y part of the yield curve looks attractive; however, the volatility around the trade is likely to be considerable as BCB policy is close to the inflexion point. 

"We still see value being long USD vs BRL, but we would wait for better entry levels, as positioning seems stretched," added Barclays.