The USD Index weakened by nearly 2% last week, in one of the worst weeks on record for the Greenback in recent times. It was a touch firmer at the beginning of the week, at 92.25, but significant gains may be limited as the market is likely to continue to focus on political risk in the US, even as President Trump undertakes his first overseas tour, heading to the Middle East and Europe this week.
In March the rating agency Moody’s had changed the outlook for Brazil’s Ba2 rating from negative to stable. Now, S&P has placed the BB rating on credit watch negative, indicating that the country might be downgraded in the coming three months. This is of course due to the rising political risks after President Michel Temer was accused of having agreed to pay bribes. For the time being the government tries to simply carry on with business as usual: to signal their support for Temer his coalition partners want to agree to some planned reforms that had been controversial so far. And regarding the important pension reform, the lower house wants to debate and vote on it in early June. However, Temer’s future remains uncertain. The authenticity of the audio recordings containing Temer’s comments on the bribes is now going to be examined. As it is still possible that Temer will have to step down BRL is likely to remain under pressure for now.
PMIs continued to surprise the market to the upside, pointing to a possible further pick-up in Eurozone from Q1 (0.5% q-o-q). However, whilst both Germany and France were both very strong, possibly also in light of the result of the recent French elections, suggesting that the services PMIs have weakened slightly in the rest of the Eurozone, a possible sign that the domestic demand might be starting to ease on the back of higher inflation. With stronger growth not yet translating into higher inflation, we don't think any significant change in monetary policy or forward guidance will be announced at the upcoming ECB meeting the 8th of June.