Short-term interest rates dip amid balanced communication; long-term rates rise on external pressures and risk premium demands
02/08/2024
/i.s3.glbimg.com/v1/AUTH_37554604729d4b2f9f3eb9ad8a691345/internal_photos/bs/2024/B/t/7LnMHXQlC35pdWY16dwA/300424denisferrari014.jpg)
Denis Ferrari — Foto: Rogerio Vieira/Valor
The reception of local agents to the Central Bank’s Monetary Policy Committee (COPOM) decision was mixed. While some of the market bet on and chose to see a harsher tone in the monetary authority’s communication given the recent depreciation of the Brazilian real and the de-anchoring of inflation expectations, another part of the investors assessed the decision as balanced. In this context, short-term interest rates closed the day with a slight drop, as bets decreased that the Central Bank would resume monetary tightening in the coming months, while long-term rates rose, with market agents demanding higher risk premiums to hold Brazilian assets.
The local market was also pressured by fears of a recession in the U.S. economy, which ended up heavily affecting the real and emerging market currencies.
At the end of the session, the Interbank Deposit (DI) contract rate for January 2026 fell to 11.565% from 11.625%, while the DI rate for January 2029 rose to 12.025% from 11.99%. The exchange rate advanced 1.43%, with the exchange rate at R$5.7349 per dollar.
According to Denis Ferrari, fixed income manager at Kinea Investimentos, the COPOM statement was good, and the authority made a correct diagnosis of the scenario. The market’s reaction was quite coherent until the external scenario showed a strong deterioration, ultimately contaminating local assets.
“The statement showed concern, but without a certain exaggeration that part of the market would like. I think the Central Bank’s diagnosis is very fair. It shows that they may, at some point, have to discuss raising interest rates, and if necessary, it will be discussed. They might even raise them, but such a move is not imminent,” he said.
Mr. Ferrari also believes that monetary policy shouldn’t try to address the problem of currency depreciation. “The exchange rate responds much more to external factors and should not be the focus of monetary policy,” he said.
The manager said he maintains positions that benefit from the local market’s decline in short-term interest rates. “I think the bar for a rate hike in September is still high. It could happen, but the Focus survey would need to keep worsening, and the real would have to fall beyond R$5.80 per dollar. Even in this scenario, I think the Central Bank could say that the risk balance has become asymmetric and raise rates in November.”
On the other hand, Sergio Silva, partner and macro co-manager at Tenax Capital, said that there has been a rapid deterioration in local assets recently, which has consumed a certain “cushion” that the COPOM kept in its strategy of keeping inflation on target with the Selic rate paused at 10.5% per year.
In this context, the manager believes that the COPOM could have issued a slightly tougher warning, making the minutes’ reading very important to understand the discussions within the committee. “We are seeing the currency at R$5.70. It is a much higher level than we saw six months ago. There is still a need for fiscal implementation and commitment to medium-term targets, which could lead to a reduction in the risk premium that the market demands. There is nothing that indicates, for now, that the scenario is improving, and things are converging to a lower level. If this is the case, the faster you act, the less you would have to react,” said Mr. Silva.
Even after the COPOM avoided signaling that it intends to raise rates in the short term, the scenario gained traction among market participants. Although it maintains the expectation that the Selic rate should start falling again in December in its baseline scenario, UBS BB sees “growing risks” of rate hikes still this year and considers a 30% chance that the Central Bank will be forced to increase the policy rate in September.
“The expected response of monetary policy and a subsequent softer fiscal policy leave us with an alternative scenario of three 50-basis-point increases in September, November, and December,” which would bring the Selic rate to 12% at the end of this year, with a resumption of monetary easing at the beginning of 2025.
In the current context of elevated uncertainties, Tenax maintains only tactical positions on the yield curve at this moment and has been making bets with a shorter investment horizon. “It seems that we have a challenging future concerning fiscal commitment. This has partly explained the underperformance of Brazilian assets we have been observing,” said Mr. Silva.
Daniel Cunha, the chief strategist at BGC Liquidez, also said that the market’s reception to the Central Bank’s statement ended up being contaminated by external factors. “We saw a risk-averse session, particularly with strong movement in the currency market, making it difficult to isolate the ‘post-COPOM factor’ in the assets. In any case, I dare say that the decision was well received, as much as possible, judging by the modest steepening of the curve, even amid the strong currency deterioration,” he said.
In his view, the narrative of a recession in the U.S. still does not seem to be supported by the data. “I do not see today’s session [Thursday] as a narrative shift or initiation of a new regime of American recession. I understand it more as a one-off adjustment, with agents wishing to lighten their positions to get through this less liquid window that occurs during the period of vacations in the Northern Hemisphere,” he said.
*Por Gabriel Roca, Victor Rezende — São Paulo
Source: Valor International