By Win Thin

Brazil Budget Minister Bernardo is doing some jawboning, which we think is a mistake. He said the central bank won't have to hike rates again this year. We don't agree with him, but regardless of that, the government must keep its hands off of monetary policy. We do take issue with some of the analysts saying that the end of the tightening cycle is here.

The bank noted, after the 50 bp hike, that "the reduction of risks to the inflationary outlook has taken shape since the last Copom meeting, as a result of the recent evolution of domestic and external factors." That is still a far cry from signaling an end to the cycle, but minutes from this meeting due out July 29 should shed some light.

There are three meetings left (September 1, October 20, and December 8). We expect two more 50 bp hikes this year that would take the policy rate to 11.75% by year-end, as momentum in the economy remains strong, in our view. Unemployment for June was just reported today at 7%, lower than expected and down from 7.5% in May. Price pressures did ease a bit in June and July, but we think underlying dynamics still point to upside risks here.

USD/BRL saw good resistance earlier this week around 1.80 and has moved lower to test the downside of the 1.75-1.82 trading range that's been in place since early June. For now, that 1.75 floor seems to be an obstacle for the real, but a strong risk-on trading environment is feeding an overall EM rally that has some room to run. After 1.75 is the April low of 1.7205 and then the fourth-quarter 2009 lows around 1.70. We think markets will get very nervous on a break of 1.75, as any move below risks bringing on more capital controls by Brazil, in our view.
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