The Brazilian Real (BRL) suffered a sharp devaluation on Thursday. The currency which was the most overvalued among major currencies according to our valuation models suffered a strong crash after a Brazilian newspaper article reported that tapes involving the president Michel Temer were presented to the prosecutors in light of the plea bargain agreement of JBS, a giant meat processing company. In the tapes, President Michel Temer is alleged to have talked about cash payments to the former president of the Chamber of Deputies of Brazil, Eduardo Cunha, who is currently in jail. The money would be a way to keep Mr Cunha "silent" and not implicate the government in the scandals of corruption.
Even though the Brazilian government has formally refused the allegation, the damage is already done: i) the already fragile political context became completely unclear - the opposition has already started talking about (a second) impeachment and ii) the ongoing market-friendly reforms proposed by the current government are very likely to put on hold. Faced with such a scenario, markets reacted quickly: the BRL which is extremely sensitive to the rise in political risk as it was observed during Mrs Dilma Rousseff’s impeachment process , devalued by 9.7% (3.41) when markets opened . From now on, the currency is likely to be highly volatile.