Itaú BBA - Fiscal reform uncertainty impacts Brazilian assets

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Fiscal reform uncertainty impacts Brazilian assets

May 22, 2017

Overcrowding exacerbated the impact of recent news, as players were anticipating a rally if the pension reform was approved in the House in the short term.

For the full report, see enclosed file

Highligths

  • Despite the political noise, the fiscal reform effort in Brazil remains on track. Our calculations show the diluted Social Security reform bill could still be seen as an important step in avoiding an ever-growing trajectory of pension expenditures.
  • The BRL traded range-bound in early-May, and Brazilian nominal rates staged a rally in the period.
  • The still-favorable global environment for LatAm and improved market expectations regarding the pension reform voting were the main drivers of this price action.
  • However, new market uncertainties on the evolution of the fiscal reform outlook triggered a major reversal of the bullish momentum.
  • Overcrowding exacerbated the impact of the recent news, as major players were anticipating a rally would occur if the pension reform was approved in the House of Representatives in the short term.
  • Brazilian authorities stepped in to support markets. The BCB released a note affirming it is monitoring the information recently disclosed by the press and acting to maintain normal market functioning. The authority concluded by stating that such monitoring of market activity bears “no direct and mechanical relation with monetary policy”.
  • In addition, the central bank stated it will make daily FX swaps auctions of up to 40,000 contracts (USD 2 billion) from May 19 to 23.
  • Likewise, the National Treasury took actions to support the fixed income markets. On May 18, the Treasury cancelled the weekly fixed rate auction, which usually takes place on Thursdays, and announced extraordinary buyback auctions of LTNs, NTN-Fs and NTN-Bs on May 19, 22 and 23.

 



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