Itaú BBA - Brazilian rates’ bull market is not over

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Brazilian rates’ bull market is not over

March 17, 2017

Negative domestic news prompted players to take profits in Brazilian rates, but we see room for further compression

For the full report, see enclosed file

Highligths

  •  The noisy domestic news flow prompted some players to take profits in Brazilian rates.
  • Despite this short-term volatility, we retain a constructive view on Brazilian fundamentals and see potential for further compression in nominal rates.
  • We have been emphasizing that BCB was open to the idea of accelerating the easing pace…
  • …and the February IPCA reinforced the sharply-falling trend in inflation.

  • Likewise, the latest Focus survey showed a hefty downward revision in the consensual expectation for inflation this year, which is now closer to our forecast.

  • Given the Central Bank’s signaling of possible intensification in frontloading the easing cycle, the disinflationary scenario and the decline in expectations, we changed our Selic call on March 14.

  • We now expect two cuts of 100bps (in April and May), two cuts of 75bps (in July and September), and one cut of 50bps (in October).

  • In the Box, we show that interest rate derivatives price in an acceleration of BCB’s rate cut cycle. The probability attributed to our baseline rose after the Fed’s dovish hike and Moody’s outlook upgrade.

 



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