Brazil: Political and long-term economic policy turnaround narrative flipped on its head - Nomura

According to analysts at Nomura, in Brazil, allegations that President Michel Temer could be involved in a corruption scandal have potentially flipped the political and long-term economic policy turnaround narrative on its head.

Key Quotes

“While we view the initial market reaction as broadly appropriate, we advise against linearly projecting today’s reaction forward, as the overall magnitude and duration of the correction remains crucially conditional on binary developments in the next few days. Indeed, as of this writing, President Temer has officially announced that he will not step down from office, thereby rejecting the allegations and opening the path towards the electoral court potentially playing an important role in his future as the president.”

“USD calls make sense for us here, even if the spike in implied vol makes the offering expensive now. One thing we learned from the political storm that led to the eventual impeachment of Rousseff is that markets could also price in improvements very quickly. A quick improvement in asset prices that makes an unwinding of bearish positions (long USD/BRL) very difficult is the main risk, particularly if the president chooses to step down at some point in the near future.”