Nevertheless, this week markets are back to full-time activity as the carnival festivities are over. The main domestic price drivers in the weeks to come are likely to be the usual suspects: lack of political cohesion and concerns about the fiscal consolidation.
The government postponed the budget announcement to March, heightening concerns about its commitment to the current budget target (primary surplus of 0.5% of GDP). Furthermore, there are discussions on introducing a range for the primary surplus target.
In terms of data, the highlight of the week is December retail sales. We forecast a 2.0% decline in the retail sales index, partially paying back the increase in November due to the Black Friday sales.
For the broader index, the fall of 6.3% m/m sa in auto sales should contract the retail sales index by 2.7% m/m during the month, representing a 8.7% decrease for the whole year.
Concerns about the fiscal consolidation, and the likely resumption of political infighting will keep weighing on local assets.
Central banks that uphold pegs have been under strain after tumbling commodity prices and slowing global growth weakened currencies from Brazil to Russia by at least 18 percent in the past year.
We maintain our long USDBRL recommendation and keep long exposure to real rates as Brazil enters a regime of fiscal dominance.