Itaú BBA - Taking profits on the front-end of Brazilian local rates – Local Rates Trade Idea

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Taking profits on the front-end of Brazilian local rates – Local Rates Trade Idea

June 26, 2018

Our base-case remains that BCB will keep rates stable in upcoming meetings, and the yield curve pricing still implies rate hikes.

On June 18th we recommended to receive the DI Jan Oct-18 at 6.82%, because our view was that BCB would keep rates stable (link). We also recommended a small short BRL/USD position at 3.75 to hedge against strong currency depreciation that could cause BCB to hike.

Today we are taking profits on the trade with the DI Jan Oct-18 at 6.54% and BRL/USD close to 3.80, which resulted in an unleveraged profit of 0.09%.

Our base-case remains that BCB will keep rates stable in upcoming meetings, and the yield curve pricing still implies rate hikes. We maintain our view that Brazil’s low external vulnerability allows policy makers to separate FX policy from monetary policy and emphasize the inflation targeting regime. 

However, the next Copom meeting is still far away (August 1st), and the jittery global scenario (especially due to rising trade tensions), added to local uncertainties, impose risks to local rates.



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