Brazil: Markets Continue to Price in Perfection - BBH

Brazil: Markets Continue to Price in Perfection - BBH

9 June 2016, 19:46
Roberto Jacobs
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Brazil: Markets Continue to Price in Perfection - BBH

Analysts from Brown Brother Harriman warn that the market is pricing in a very optimist scenario in Brazil and affirm that if global markets turn again it will be amongst the most vulnerable.”

Key Quotes:

“Markets continue to price in perfection for Brazil:  successful impeachment, cyclical upturn, and structural reforms.  We believe markets are being too optimistic, but the favorable global backdrop should continue to boost Brazilian assets.  When global conditions turn again, Brazil will be amongst the most vulnerable.

“The economy appears stabilizing, but an upturn may be elusive.  GDP is forecast to contract -3.8% this year, same as in 2015.  However, growth is expected to resume modestly at around 1% in 2017 and 1.5% in 2018.  GDP contracted -5.4% y/y in Q1.  This was slightly better than expected, but reminds us that there’s still a deep hole to dig out of.”

“Price pressures have fallen but remain elevated.  IPCA consumer inflation rose 9.32% y/y in May, up slightly from April.  Inflation has been above the 2.5-6.5% target range since January 2015.  Still, these are the lowest rates since June 2015, and support the view that the next move is a cut.”

COPOM just left rates steady at 14.25% late last night, at Tombini’s final meeting.  The next meeting July 20 will be under Goldfajn, and it will be a tough call if inflation pressures continue to rise.  If BRL continues to firm, that could push inflation lower.  However, it may be too much to expect Goldfajn to cut rates at his very first meeting.  Perhaps August 31 is more likely.

“There appears to have been a significant change in strategy from the Brazilian central bank.  USD/BRL gapped lower Wednesday to make new lows for the year near 3.35, and tested that area again today.  Yet BCB still has not announced any reverse FX swaps.  Back in April and May, the BCB leaned against the wind and sold reverse swaps aggressively to temper BRL gains.  BRL is now at its strongest since last July, and the low from last June near 3.03 is coming into focus.”


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