Itaú BBA - Brazilian rates will likely retrace as the external landscape becomes clearer

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Brazilian rates will likely retrace as the external landscape becomes clearer

November 22, 2016

The recent sell-off in Brazil seems exaggerated to us, as the domestic story for local rates remains positive.

For the full report, see enclosed file

Highligths

  • The results of the U.S. elections will bring major policy changes. We believe Trump will be able to implement a fiscal stimulus, and hence have incorporated it into our forecasts. There is too much uncertainty about his agenda on trade, immigration, regulation and micro reforms. For now, we treat these as risks to the scenario. 

     

  • Brazilian assets rates sold-off after the U.S. election, alongside peer markets…

     

  • … but the price action in fixed income markets seems exaggerated to us.

     

  • In fact, despite the heightened volatility, the idiosyncratic story for Brazilian local rates remains positive for receivers…

     

  • … as the Lower House approved a constitutional amendment that creates a spending cap by a large majority and the downward trend in inflation is consolidating.

     

  • Additionally, 3Q activity data disappointed, which could prompt markets to price-in a faster pace of rate cuts.

     

  • In all, we believe local rates will retrace ahead, as the spending cap bill is made into law and the BCB proceeds with a gradual easing cycle.

  • In this month’s Box, we show how the external shock changed the probability attributed by the market to different Copom scenarios.
     

 



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