USD/BRL price action dominated by uncertainty about the political and fiscal situation in Brazil

USDBRL price action should continue to be dominated by uncertainty about the political and fiscal situation in Brazil. If Henrique Meirelles assumes the position of finance minister in the weeks to come, the initial market reaction could be positive. However, it will be a game changer, as there is no clear plan either to improve potential output by pushing structural reforms or to cut discretionary spending. Therefore, USDBRL will move toward 4.50 in the year to come as monetization concerns increase.

Data-wise, the unemployment rate (Thursday) is expected to increase 10bp; however, once seasonally adjusted, a stronger deterioration of 30bp is likely. Formal job eliminations and lack of confidence in an economic turn suggest that the deterioration in the labor market could continue.

For IPCA-15 inflation, a mix of regulated prices pressures is expected in this release, with electric energy and gasoline on the way up, whereas liquefied gas prices adjustments should fade from the index. Food prices will likely continue to accelerate, and the IPCA-15 index is expected to post a 10.3% y/y increase.