Brazil's relief rally likely short-lived

Brazilian assets had a relief rally in the past few weeks as weak US employment report and dovish FOMC minutes pushed back expectations of a Fed hike rate well into H1 16, combined with the positive reaction to the scramble in government that gave seven ministries to PMDB. This rally is likely to be temporary as political uncertainty continues to gather market attention. 

This week should bring the upholding of presidential vetoes to laws that would weaken the fiscal consolidation effort, which were not voted by Congress last week, despite the repartition of ministries. The delay in the voting of vetoes, the TCU (Federal Court of Accounts) ruling recommending rejecting the 2014 public accounts (on which an impeachment process could be justified), and the likely investigation for irregularities in President Rousseff's re-election campaign were the most recent blows to her already very weak position. While the government struggles to remain in power, structural reforms that are needed to improve the fiscal outlook and potential growth are not being discussed, as the economic outlook continues to deteriorate. 

"We believe the lack of decisive action will weigh heavily on Brazil's near-term future; as such, we remain bearish BRL and would take any USDBRL sell-off as an opportunity to build short Reais", says Barclays.

This week's data should confirm the poor state of the economy as we receive August retail sales (consensus -0.5%m/m, -5.8% y/y) and job creation on Wednesday.