USD/BRL to resume its upward trend in the upcoming weeks

It is believed that the recent BRL "stability" is only temporary and that USDBRL will resume its upward trend in the upcoming weeks. While the government tries to gain some support to remain in power, the structural and meaningful reforms that would cut expected expenditure and help improving potential GDP are not being discussed.

"Although we acknowledge that there could be some retracement in the near term (due to heavy positioning and Central Bank intervention), we would take any sell-off in USDBRL as an opportunity to build short Reais", notes Barclays.

Under current circumstances, much of the damage has already been done. In a scenario in which there is no meaningful change in the administration in the months to come, followed by a strong coalition and a clear action path to regain market confidence, markets will continue pricing a higher probability of debt monetization. 

"We continue targeting 4.50 in the months to come with substantial upside risks", added Barclays.