Itaú BBA - Brazilian curve poised to flatten

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Brazilian curve poised to flatten

August 14, 2017

Barring a shock, we see room for the Brazilian nominal curve to flatten ahead.

For the full report, see enclosed file

Highligths

  • The positive environment for EMs is still on, as global growth remains solid.
  • Interest rates in DMs are likely to continue rising, but the pace will be slow, as the Fed and ECB are careful not to derail the global recovery. Capital flows to LatAm benefit from this environment.
  • Most Brazilian assets strengthened back to mid-May levels, additionally boosted by market expectations of renewed efforts to push through needed reforms and adjustments.
  • The BCB saw no meaningful impacts of the uncertainty shock over short-term economic developments, and signaled the base case for now is another 100-bp cut in September.
  • In this context, the front-end of the nominal curve is fairly aligned with the central bank’s guidance…
  • …whereas the long end seems excessively cheap to us. Barring a shock, we see room for the Brazilian nominal curve to flatten ahead.

 



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