Exposure rates of the Dorval Asset Management Range – 29th November 2019

The Brazilian real broke through the symbolic 4.25-to-dollar mark last week, sliding beyond its lows of September 2015 in the midst of President Dilma Rousseff’s impeachment process. 

At the time, the central bank had been forced to hike interest rates to as much as 14.25%, and the Brazilian CDS, which reflects the cost of safeguarding against sovereign default – i.e. credit risk – was above 500bps. However, there was none of that last week. Key interest rates actually stand at barely 5%, and are set to come down further in December, while the CDS is close to all-time lows at 124bps (cf. chart). So just where is this massive divergence between the exchange rate and credit risk coming from in Brazil and what conclusions can we draw?


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