Analysts at Capital Economics doubt that the political concerns in Brazil that have contributed to the latest sell-off in the Brazilian real will go away, which is why they expect the real to be one of the few Emerging market currencies to depreciate against the US dollar over the next two years.

Key Quotes: 

“The removal of Petrobras’ CEO matters primarily because of what it suggests about the outlook for both fiscal policy and structural reform. The fact that it has happened on the back of a dispute between the government and the company over unpopular hikes to gas prices suggests that the short-term desire to maintain political support is increasingly shaping economic policy – making significant fiscal consolidation less likely. The decision is also part of a broader move towards greater state involvement in the economy, which has reduced hopes of further structural reforms.”

“Policymakers may also resort to financial repression to limit any increase in local currency bond yields. In an emerging market like Brazil this would probably put additional pressure on the currency.”

“We forecast the Brazilian real to fall from around 5.45/$ currently to 5.75/$ by the end of 2022, even as EM currencies generally gain ground against the US dollar.”