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Underlying Optimism For Local Assets As Fiscal Details Awaited

  • Brazilian asset prices rose across the board on Wednesday, with no news appearing to be good news as market participants await the details of the new fiscal framework. Lower volatility and attractive carry continue to underpin optimism for the Brazilian Real.
    • Initial support was tested at 5.1106, the Feb 23 low. A sustained break of this level would signal scope for a return to 4.9410, the Feb 2 low.
  • There was also an impressive rally across equity markets and the local DI swaps curve with front-end DI swap rates falling around 20bps and maintaining this bias at Thursday’s open.
  • The front-end of the DI curve may be reflecting the administration’s rhetoric surrounding the need for lower interest rates and their hope that an improved fiscal outlook will provide the BCB with the opportunity to ease policy.
  • Of note, a former director at Brazil’s central bank highlighted the worsening credit outlook amid troubles facing local retailer Americanas SA raises the risk of a recession that could lead the BCB to change its balance of risks at its next meeting.

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