Currency and political uncertainty on top of BCB's price action

The improvement in the Brazil's external sector, reflected by the reduction in the current account deficit and low risks of a balance of payment crisis, does not prevent from expecting further currency weakness. The higher uncertainty underlying the global backdrop, led by China, is echoed by the local political risks. 

"Also, we find it unlikely that the central bank would step up its intervention aggressively, given the high FX hedge ratios among local corporates and high mark-to-market losses from past interventions. As such, our forecast for the BRL has moved to 3.80 per dollar by the end of this year and 4.10 by the end of 2016", says Barclays.

With a deeper recession, lower Congressional support, risks of impeachment, and President Rousseff's approval rating in the single digits, the political crisis will likely worsen, reducing the probability of any corrective measures that are fundamental to maintaining Brazil's investment-grade rating. The recent change in fiscal target leaves this harmful dynamic wide open, increasing even further the risk perceptions in Brazil, which has been driving the currency. 

"We do not discard overshoots of the currency, especially if the president increases her isolation", added Barclays.