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Brazilian assets are apparently keeping their historical high-beta pattern as in the previous week where U.S. yields and USD gave some respite, it is no wonder that some national assets improved.

Key Quotes

“For the week (May 21-25), the BRL was the strongest among the major currencies, paring recent losses and appreciating 2.2% to settle around 3.66/USD (Comdty FX: 0.8%). While that partly reflects the increased BCB action (adding USD 5 billion in FX swaps in May), our models suggest that about 65% of this week’s gain follows the decline in U.S. yields and gains in (farm) commodities. We still see BRL under pressure for some time ahead (until we get clarity on global conditions, local elections). Our short-term fair-value models point to 3.70-3.75.”

“In other assets, nominal rates in DI futures fell about 18bps for Jan-20, Jan-21, as the FX respite allowed some corrosion of hefty premia built in recent weeks. While the Copom minutes reaffirmed the BCB’s plan to hold rates for months to come, there were further signs of low (core) inflation, favouring a scenario of low rates for long (such as ours).”

“The Ibovespa index underperformed amid market doubts about the framework for the energy sector after an intense truckers’ strike. While the latter could start to fade in coming days, there could be short-term economic impacts (e.g., higher inflation, lower activity), with some potential increase in fiscal costs for this year.”

“This week’s calendar features the 18Q1 GDP report (Wed). We look for a sequential growth of 0.3% q/q, consistent with a 1.0% y/y gain. This result may underscore our below-consensus call for the full-year GDP (2.2% vs. 2.5% consensus), with downside risks increasing even around our own number. Overall, the data still points to a gradual economic recovery.”