BRL: Cautious stance over the coming weeks - Nomura
BRL underperformed the region in the past week as a combination of local and external pressures continued to weigh on general sentiment in LatAm.
“In our view, the ongoing volatility in FX continues to justify a cautious stance over the coming weeks, particularly as dynamics in US rates and broader EM sentiment remain the key drivers for now. In the near term, we see the reintroduction of risk premia in the local curve offering a better risk/reward profile in tactical front-end receivers to capture the likely continuation of policy rate cuts by the BCB.”
“Over the medium term, the outlook for Brazilian assets will remain closely tied to developments in the presidential election in October 2018. In particular, it will be critical for the market to understand the likelihood of leftist former President Lula joining the race.”
“Overall, we are comfortable with our tactical receive bias in DI rates given favourable local conditions, but remain cognizant of the fact that recent moves have been driven to a large extent by USD dynamics. It therefore remains crucial that investors isolate this latter effect going forward.”