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BofA Open Jan29 Receiver At 11.94%, With A Target At 11.00%

BRAZIL
  • BoA, one of two analysts calling for a cut at tomorrow's Copom meeting, have opened a Jan29 receiver at 11.94%, with a target at 11.00% and stop at 12.50%. They note that the trade benefits from total carry of 13bp/3m and its historical volatility is 65bp/3m. The main risks to the trade are rising inflation expectations and looser fiscal policy.
  • BofA believe less than half of the significant rise in local yields over the last three months is due to weakening fundamentals, namely higher inflation expectations and budget deficits. The rest of the move, in their view, is explained by positioning and risk aversion. Although the BCB is likely to end its easing cycle soon, it will most likely be able to re-start it next year given high real interest rates, which remain well above neutral levels.
  • On the fiscal front, BofA believe Finance Minister Haddad could muddle through by cutting discretionary spending for a while. However, substantial constitutional reforms are unlikely before local elections this autumn. Their analysis suggests that the 2s5s slope is almost 30bp too steep. This suggests there is more value in Jan29s than in Jan27s and so they close their Jan27 receiver at 11.60% and open a Jan29 receiver.
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