HALISTER1: Brazil’s Govt Agenda Favors Mkts; BCB Caution on Rates: Barclays

Brazil’s Govt Agenda Favors Mkts; BCB Caution on Rates: Barclays

(Bloomberg) -- Reform agenda from acting president Temer may help Brazil assets, while the BCB may cut its rate this year at a slower pace than priced by swap market, Bruno Rovai, economist at Barclays, says in a phone interview.
  • “The market is giving a confidence vote in the Temer government,” Rovai says
  • Assets may extend gains after final impeachment vote for suspended president Rousseff, expected at end of Aug.
  • Global market favoring more risky assets also benefit BZ assets
  • While CPI expectations may ease further, leading BCB to start cuts in second half, the pace may be slower then anticipated, Rovai says
  • “The fiscal policy improvement will take time and that will require the real interest rates to stay high for a extended time”
  • Rovai expects BCB to start cutting Selic rate in October, with a -25bps move; rate to close 2016 at 13.75% vs current 14.25%; DI rates prices in ~75bps cut through the 2H16
  • NOTE: DI rates spread has flattened to a record level, following recent BRL gains after new govt pledged to improve fiscal policy and privatizations, along with BCB’s more hawkish tone; see chart of DI spread here
  • NOTE: BRL outperforms most EMFX even with BCB offering reverse swaps; Brazil 5Y CDS breached 300 points, reaching the lowest since July 2015
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Bruno Rovai (Barclays PLC)
Dilma Rousseff (Federative Republic of Brazil)
Ilan Goldfajn (Banco Central do Brasil)
Michel Temer (Federative Republic of Brazil)

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