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Free AccessJP Morgan Stays Neutral Rates And FX, Keeps Jan 26 Receivers
- After trimming risk in Brazil last month, JP Morgan remains neutral FX and local rates. BRL’s inability to find relief amid a decisively more hawkish and unified central bank raises questions around the extent to which the weakness can continue in both FX and rates. However, the shift in FX positioning has already been sizeable and according to their valuation metrics the space for a relief is sizeable in BRL. Accordingly, JPM are keeping tactical exposure to an improvement in sentiment.
- JPM notes that the likelihood of FX intervention grows as BRL keeps underperforming EM peers, but better government guidance on the fiscal outlook is a necessary condition for a sustainable recovery. The bi-monthly revision to the budget due on July 22 will be key to shape the medium-term path for Brazilian assets. According to JPM, at least a BRL 20bn expenditure freeze would be needed to keep the current fiscal targets afloat.
- The likelihood of rate hikes has risen lately and could happen if inflation expectations move higher driven by the weak currency, but it is not JPM’s base case. They are holding on to the DI Jan 26 receiver through the volatility for now, especially given the BCB has not yet validated the possibility of higher rates, and relief to the front end of the curve can come quickly if hikes do not materialise.
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Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.