Brazil: Seeking to roll with the punches - Rabobank

The reduction in global appetite for EM assets continues to weigh massively on Brazilian assets, according to analysts at Rabobank.

Key Quotes

“Amid uncertainties about this year’s elections and implementation of fiscal reforms, Brazil is keeping its historical high-beta pattern within the class, despite some good fundamentals (e.g. low inflation expectations, solid balance of payments).”

“For the week of May 14-18, the so-called “Brazilian package” posted big losses: BRL sank 3.7% to 3.74/USD, weakest level since March 2016 (EM FX: -1.9%). That has prompted the BCB to increase a bit on May 18 the supply of hedge to the market via FX swaps. Brazil’s 5-year sovereign CDS jumped 18bps to 203bps, highest level since September last year (EMs: +8bps).”

“In other assets, the Ibovespa stock index plunged 3% for the week, and DI futures yields jumped about 40-50 across the curve for the same period.”

“Economic activity continued to disappoint the most optimistic analysts (and move closer to our gradualist scenario) after the release of March IBC-Br, the BCB’s monthly GDP proxy. But that was not enough for the BCB to keep its flight plan (of cutting rate): the authority surprised the market with a decision to pause (likely end) the easing cycle, as worse external conditions reduced the risks that inflation persistently lags the mid-target for key policy horizons.”

“This week’s calendar has monetary policy and inflation on the limelight. The Copom minutes (Tue.) may shed more light on the BCB’s risk assessment and flight plan. The calendar also features May’s IPCA-15 inflation index (Wed.): we project a 0.24% m/m gain, keeping the year-over-year reading at 2.8%, still below the low end of the BCB’s target.”