More volatility as Brazil 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. 

"Additionally, the recent COPOM statement is suggesting that it has concluded its hiking cycle and it is expected 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. The 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. Long USD vs BRL is advisable, but better entry levels are awaited, as positioning seems stretched", added Barclays.