Itaú BBA - Risk of another sovereign downgrade weakens the BRL

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Risk of another sovereign downgrade weakens the BRL

December 14, 2015

Moody’s placed Brazil’s sovereign rating on review and paved the way for a downgrade

(full report attached)

Exchange rate closed the week at 3.87 reais per U.S. dollar

Moody’s placed Brazil’s sovereign rating on review and paved the way for a downgrade, in a decision that may take from 30 to 90 days. Following the announcement, the currency weakened and closed the week at 3.87, a 3.11% depreciation that was in line with its peers (Charts 1, 2, 3 and 4).

Central bank continues to carry out line auctions 

The monetary authority maintained the rollover of contracts expiring in January at a pace of 11,260 contracts per day. If this pace is sustained, contracts will be fully rolled over for a fifth consecutive month. The central bank also carried out two line auctions of up to $500 million (Charts 5 and 6).

Currency flow was slightly positive during the first week of December 

The currency flow is positive by $339 million in December, after a strong inflow in November. Month-to-date, there were $1.6 billion trade inflows and $1.2 billion financial outflows (Charts 7 and 8).

No external bond issuance last week

No bonds were issued by Brazilian companies overseas. Year-to-date, issuances add up to $8 billion (Chart 9 and table).

Foreign flows to the stock market are negative 

Foreign flows to the stock market are negative by $847 million, dragged by $264 million outflows from the futures market and $583 million outflows from the spot market (Chart 10).

Investors reduced their positions in dollar futures

Institutional and foreign investors reduced their long positions in dollar futures by $1.4 billion and $1.6 billion, respectively. Other investor positions in FX derivatives were virtually unchanged. Non-residents, banks and institutional investors hold positions in FX derivatives of $27 billion, $51 billion and $26 billion, respectively (Charts 11, 12, 13 and 14).


 



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