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Staying Conflicted in Brazil
On the one hand, we have stronger growth and high rates. Credit, durable spending, retail consumption and imports are all still rebounding sharply, leaving Copom very cautious even at today's near-record real interest rates.
On the other hand, we also have rising debt ratios and a worsening external balance. Strong demand and cooling exports have pushed the current account deficit back out to 4% of GDP, and the combination of Brazil's weak budget position and large rates/growth gap is pushing up the public debt ratio as well.
The answer for us is to avoid taking extended positions for now and stay tactical. We're not willing to commit to a medium-term view on equities or local fixed income for fear of getting blindsided by external imbalances, but we're keeping our short-term BRL carry position for the moment pending further data.
Staying Conflicted in Brazil (PDF)
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