OctaFX | OctaFX Forex Broker
Open trading account

Forex Flash: Brazilian Inflation and the Central Bank - BBH

FXstreet.com (Barcelona) - Ilan Solot, Emerging Market Strategist at Brown Brothers Harriman believes that a tightening cycle by the Brazilian Central Bank in May may begin.

He begins by noting that after all the usual cross-communication, markets seem to have truly incorporated only one notion: rate hikes will be gradual (i.e. 25 bp at a time). This is contrary to his normative view that, ideally, the BCB should front load hikes in April to rebuild confidence and try to get away with doing around 100 bp only this year. However, when considering the political/institutional backdrop, a gradual tightening cycle starting with 25 bp in May looks more likely.

He sees three factors that make him lean towards a May start instead of an April start.

Firstly, Government Measures. He writes, “As well understood by now, the government has taken several short-term measures such as tax cuts and reducing administered prices to help the BCB in controlling inflation. If the BCB was about to start the tightening cycle in April, why would the government go through the trouble to implement all these measures and weakening its fiscal accounts?

Secondly, March IPCA was inconclusive. He notes that the much awaited inflation report came in marginally lower than expected at 6.59% y/y, though still breaching the upper end of the target range. In short, the closely watched diffusion index was lower at 69.0% from 74.2% last month (good news) but the core numbers were worse at 6.04% from 5.84% (bad news). Still, several items in the index are expected to start coming down in the following months, especially food, which will benefit from lower taxes and softer agricultural prices. Solot sees that this may take out some of the urgency to hike.

Finally, BRL: Solot sees that a stronger real can only play in favour of delaying the hikes. Even though he thinks they will defend the 1.95 level for now, the move below the 2.00 level against the dollar, if sustained, can take some steam out of inflationary pressures.

He finishes by writing, “As we noted in our “Stagflation-Light” report, the difference between Brazil and other emerging markets is that government decisions had, and will probably continue to have – a very strong impact on asset prices. This was made clear by the performance of the Bovespa and recent moves in Brazil’s CDS prices. With a 50% chance of a hike in April still priced in, we are concerned that markets may be disappointed by a decision to stay on hold, leading to a negative reaction in asset prices.”

Forex: NZD/USD establishing fresh highs at 0.8624/29

The NZD/USD has shot higher Thursday after receiving an impetus from domestic housing prices. The pair is establishing fresh maximums at 0.8624/29 in these moments, securing an advance of +0.58% above its opening as it bulls through resistance during European trading.
Read more Previous

Forex: EUR/USD in session highs around 1.3090

The single currency is printing fresh highs in the vicinity of 1.3090 on Thursday as risk appetite is swelling amongst investors. In the meantime, market participants would focus their attention on the Italian 3-year bond...
Read more Next
Start livechat