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BRAZIL: Deutsche Bank Recommends 5Y Bonds, FX-Unhedged

BRAZIL
  • Deutsche Bank says that the BCB is most uncomfortable with high inflation expectations, which is inertial and highly dependent on current inflation. Only a rally in BRL could reverse the rise in expectations, in their view.
    • DB believes the BCB is poised to validate market pricing for a 25bp hike next week, but a slow pace of rate hikes may fail to strengthen the currency materially, although USDBRL may be trading near the high end of its range. To achieve the inflation target by 1Q26, DB believes the Selic rate would have to rise to ~12%.
    • On rates, DB believes that the monetary premium is high, but sees no value in short-end receivers, since communication has been haphazard, BRL has yet to firm, and fiscal policy lacks credibility, which may require a less gradualist tone.
    • Instead, they prefer to extend duration on the view that monetary policy will have to tighten as much as needed to anchor both the currency and the back end at stronger levels. They are recommending 5Y bonds - FX-unhedged.
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