BRL: Fiscal policy remains a burden – Commerzbank

The Brazilian real has been on a rollercoaster ride in recent weeks, Commerzbank FX analyst Michael Pfister notes.

Trades right below 5.70

“After reaching its highest level in almost two and a half years at 5.70 in early July, the c exchange rate fell sharply in the following days amid pronounced USD weakness. However, the low levels did not last long.”

“One can almost feel sorry for the Brazilian finance minister. For weeks he has been trying to reassure the markets that Brazil is taking concerns seriously and reducing the budget deficit, only for Lula to raise fresh doubts. Friday's announcement of a BRL15bn spending freeze did little to help matters.”

“Granted, this is not even half of the deficit accumulated so far this year, but it was a first step. But as long as the market fears that these efforts will not be sustained, BRL will struggle. Either Lula turns to a more balanced fiscal policy or the USD will have to weaken significantly again — otherwise we are unlikely to see significantly lower USD/BRL levels in the coming weeks.”