Halister News

(Bloomberg) -- BRL may extend gains through 2017 as expected U.S. Fed hikes and BCB rate cuts are unlikely to damp flows into Brazil’s assets, Gabriel Gersztein, head of strategy for Latam at BNP Paribas, says in a phone interview.

• “Fed rates adjustment will be gradual and that may help to give some support for Brazilian assets”
• While expected BCB rate cuts may impact BRL/USD carry trade transactions, lower rates may boost investments, economic growth and govt revenues; debt costs may diminish, improving the risk perception
• NOTE: BNP gave forecasts on Oct. 3 for USD/BRL of 3.15 in 4Q16, 2.95 in 1Q17, 2.90 in 2Q17, 2.95 in 3Q17 and 3.00 in 4Q17
  • Brazil shows a more constructive scenario compared to the “perfect storm” seen in 2015, with Fed first hike, oil plunge, China devaluation and local political and fiscal crises, recession, inflation jump and Petrobras scandal
  • Brazil benefits now from reform agenda, CPI slowdown, trade balance surplus, along with external backdrop of low rates globally and China growth
  • Repatriation bill may help to boost inflows
  • BCB FX swaps holdings may end in coming months should the bank continue with daily auctions, adding to positive pressures on BRL
• Brazil is entering a “virtuous cycle,” Gersztein says
• Tailwind risks for the positive scenario are acceleration of U.S. inflation that boosts the pace of Fed hikes, along with negative political developments and, in Brazil, the government eventually failing on reforms approval
• NOTE: BNP economists see BCB starting a a rate-cut cycle in Oct with -50bps; Selic may close 2017 at 9.25%; GDP to grow 2% in 2017 and 3% in 2018 after 3% contraction this year