Brazil monetary policy outlook got a little hazier after mid-August IPCA inflation fell by -0.05% compared to expectations for a 0.06% month-to-month rise. It was the second straight month-to-month drop, while the year-over-year rate eased to 4.44% from 4.74% in mid-July and was the first time below the 4.5% target since mid-January.

The Central Bank meets Aug. 31/Sept. 1 and the market is now looking for no change after earlier looking for a 25 bp hike to 11%. We have viewed the bank on the more hawkish side, as we felt that domestic activity remains strong. However, the recent easing of price pressures cannot be ignored.

It is now possible that the bank goes on hold for the remainder of the year to see how things develop and then act in 2011 as circumstances warrant. Tightening could resume if the economy accelerates again, but wait-and-see seems prudent for now.

USD/BRL continues to find very strong support around 1.75, which will be tough to break through, given rising concerns about global growth. While BRL upside is limited, investors seem keen to buy the currency on weakness as this past week's jitters did not see USD/BRL move above 1.78. High interest rates are likely to keep the real very attractive for foreign investors and so for now, we would play the 1.75-1.80 range that has held for most of of the third quarter.

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