Now that the dust is settling after Brazil’s pro-government demonstrations, a clearer picture starts to emerge; it doesn’t look good to our eyes, but we may have reached a local maximum in tensions. Brazil has been relegated to the “tactical trade” bucket for some time, and recent events just add to our conviction that this is where it belongs. Our medium-term bias remains negative, but we take a tactical positive view on the real near USD/BRL 5.30 in the short term. In short, we think we reached peak tensions for this episode, and investors may temporarily focus on the growing carry – which at the very least desensitizes those longing to be short. Next COPOM meeting is September 22 with a minimum 100 bp hike to 6.25% is expected. The local curve has already steepened to incorporate rising inflation and political risks, so we don’t see a huge upside there. The main risk to our short-term view is the trucker strike gaining scale. 

• The good news: No social unrest. Protests were peaceful, and the worst-case scenario of public buildings (especially the judiciary) being invaded did not occur. Scenes like the ones we saw in the U.S. after the Trump January rally in DC would have compounded the sense of anxiety about the situation. President Bolsonaro got his “photo moment” with scores of supporters and may feel that he made his point. Although we don’t see any chance of a material de-escalation, Bolsonaro and the Supreme Court have played all their cards for this episode, so tensions should moderate in the near term, in our view.

• The mixed news: The government will be pleased that the size of the demonstrations was larger than many had expected, especially in Sao Paulo. This means that President Bolsonaro’s support base remains sizable, even if dwindling. On the negative side, this show of force will embolden Bolsonaro’s combative posture, validating (at least in his mind) the path he has chosen. On the other hand, showing a vigorous support base helps keep the centrist parties from defecting (for now). The upshot is maintaining a minimum level of governability while also reducing the impeachment risk.

• The bad news: The rift between the three branches of government has only widened. Bolsonaro stepped up his hostility against the judiciary, dashing all hopes that he could have adopted a conciliatory tone. There were implied references to authoritarian actions and explicit comments about disobeying judicial orders. On the former, we think it’s just rhetoric to fire up his base; even with the sizable support in the military and police, we don’t see a high risk of a coup or hard-line anti-democratic action. On the latter, Bolsonaro said he would not obey any judicial order by Supreme Court Judge Alexandre de Moraes. We don’t know what this means, and we suspect that nobody will know until it happens – if it does. But if he actually disobeys a judicial order, it would create a direct line towards impeachment.