Itaú BBA - Copom likely to speed up easing in 2017

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Copom likely to speed up easing in 2017

December 16, 2016

After a string of positive recent events the market started to price-in an acceleration in the easing cycle.

For the full report, see enclosed file

Highligths

  • Despite some recent volatility, Brazilian assets are set to end the year on a high note.
  • The approval of the spending cap constitutional amendment, another downward CPI surprise in November and BCB’s communication open the door for an acceleration of the easing cycle.
  • As the market increased the monetary easing expected for next year over the last couple of months, economists’ consensus for YE17 Selic fell towards our 10% p.a. forecast…
  • …meanwhile interest-rate derivatives price-in a rate cut acceleration in the first semester of 2017.

  • We believe the pace of interest-rate cuts is likely to increase to 50bps per meeting throughout 2017…

  • …whereas the information concealed in “swaptions” reveal that markets attribute roughly 75% probability of a faster easing in 1H17 than our baseline scenario.

  • All in all, we believe fundamentals still support receiving long Brazilian nominals. In DI1 futures, the Jan-21 settled at 11.92% on December 15 and will likely stage a major retracement in 1H17.

  • With the markets pricing in an acceleration of the easing pace on top of the 50-bp cut per meeting we foresee, DV01-neutral flatteners also seem attractive.


 



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