Pablo

The fast deterioration of the current account deficit seen between mid-2012 and mid-2013 has been stopped by the BRL depreciation, but we have yet to see its reversal. While we did expect that the reaction would be slow due to the lagged impact of the BRL on some current account items, in reality the adjustment has been even slower than we expected.

However, the change in tone in FOMC communications and the improvement in market sentiment toward emerging markets (and, to some extent, toward Brazil) have, at the same time, sustained external financing conditions more comfortably than we previously expected. This paved the way for the BRL appreciation despite the still wide current account deficit, and will likely lead to some change in the FX swap program going forward – we expect the BCB to maintain the daily schedule, but at a slower pace, and to reduce on rollover on a case-by-case basis, according to market conditions.

Nevertheless, the structural determinants for our call of a weaker BRL are all still there – the competitiveness problem persists (as evidenced by the poor trade and CAD figures), and the normalization of US monetary conditions will come sooner or later. The BCB reaction in terms of swap supply and the evolution of the sentiment toward US monetary policy (and to Brazil’s own policy challenges going into a new Presidential mandate) will be crucial to determine the timing of the depreciation of the BRL. 5

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