Itaú BBA - Reform doubts suppress Brazilian rates

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Reform doubts suppress Brazilian rates

June 14, 2017

The more challenging fiscal scenario keeps Brazilian yields at a standstill.

For the full report, see enclosed file

Highligths

  • The complex political situation in Brazil will probably delay needed reforms that require congressional approval. This increases the challenge to regain fiscal equilibrium, with negative impacts on the BRL and local rates.
  • In this context, we revised our forecast for the IPCA consumer price index downward for 2017 to 3.7% from 3.9%, but raised our call for 2018 to 4.1%, from 3.8%, due to exchange-rate depreciation.
  • We maintained our estimate for the Selic benchmark interest rate by YE17 at 8.0%. We expect the pace of rate cuts to slow down to 75bps in the Copom’s July meeting.
  • In Mexico, we see value in receiving the long end, as we think the government will likely meet its fiscal targets and expect further narrowing of the current account deficit.
  • By the same token, Mexican implied inflation have halted the convergence towards the 3% target in May, as the latest CPI readings show price increases are becoming widespread.
  • We expect the convergence of breakevens in Mexico to resume ahead, as the market ponders the lagged effects of the MXN strengthening and weaker activity.

 



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