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DI Swap Rates Thrive Following Lower Inflation Print, BRL Under Pressure

BRAZIL
  • Today’s lower-than-expected IPCA-15 inflation print set the tone for Brazilian asset price moves on Thursday, as renewed calls for rate cuts gain traction. Di contracts expiring between Jan25 & 26 have fallen around 17bps, in stark contrast to the moves for core yields.
  • The data indicated that inflation has now shown 12 straight months of declines, potentially bolstering the administration’s calls for a reduction in the nation’s Selic rate.
  • Indeed, there has been renewed pressure on the currency, with USDBRL rising 1.20% as of writing, reversing the entirety of the post fiscal framework approval optimism. USDBRL now trades at the best levels since May 09, significantly narrowing the gap with firm resistance at 5.0330, the 50-day EMA. A break of this average would alter the current technically bearish picture.
  • However, it remains to be seen if the most recent data will sway the hawkish stance of the Copom. BCB Governor Campos Neto remains worried about readings of core inflation, which exclude items like gasoline and food, as well as elevated forecasts showing price increases picking up again later this year. The disinflationary process requires “patience and serenity,” Campos Neto said in an interview recorded on May 4 that was released Thursday morning.
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