Back
2 Apr 2014
Latin America EM Express: Brazil central bank expected to hike rates
FXStreet (Łódź) - Brazil's central bank will announce its monetary policy decision today and the general expectation is that it will raise the benchmark Selic rate by 25 bp to 11%. The central bank's monetary policy committee, known as Copom, has been worried recently about the increase in inflationary pressures, as prices of meat and vegetables have risen after a drought struck the country's south-east regions.
Last week the Copom raised its 2014 inflation forecast to 6.1% from 5.6% and suggested that the uncertainty over the future of state-controlled fuel and energy prices also posed a risk to inflation.
Jacqui Douglas, Senior Global Strategist at TD Securities also expects that “the post-meeting communique will leave the door open for a further and final 25bp hike at the following meeting.”
The rise in inflation could diminish support for Brazil's president Dilma Rousseff ahead of the elections scheduled for October, and consequently push her towards adoption of fiscal stimulus.
According to the BBH Global Currency Strategy Team: „The consolidated budget balances have stabilized in recent months, but at far weaker levels than in the past. Fiscal slippage was a major factor behind S&P’s recent one notch downgrade to BBB-, but the stable outlook lines up with our view that further downgrades below investment grade are unwarranted now.”
Economic data
There was a slew of Brazilian economic data released on Tuesday and Wednesday, just before the central bank's monetary policy announcement.
On Tuesday Brazil's Ministerio de Comercio informed that the trade deficit of USD -2.125B recorded in February shifted to a USD 0.112B surplus, slightly higer than the expected USD 0.10B.
February Industrial Production data, released on Wednesday, showed a 5% increase year-on-year, compared to the 2.2% drop in January. On a monthly basis industrial output grew 0.4%, down from the 3.8% rise.
Technicals
On Tuesday USD/BRL rose by 0.17% to 2.2697. The daily FXStreet Trend Index was slightlly bearish, and the OB/OS Index oversold. RSI was neutral at 29 at the last close. Daily 2-StDev Volatility Bandwidth was expanding at 43 pips, with ATR (14) expanding at 19 pips. The 1D 200 SMA was at 2.3072, while the 1D 20 EMA at 2.3144.
The BBH Global Currency Strategy Team believe that „a stronger real will be accepted as part of the battle against inflation, and that policymakers will not try to prevent this.”
“So far, there has been no protest whatsoever from officials regarding the drop below 2.30 for USD/BRL. The 2.25 level has been tested but not yet decisively broken. If the rest of EM currencies rally, as we expect, then BRL will most likely break below 2.20.”
Last week the Copom raised its 2014 inflation forecast to 6.1% from 5.6% and suggested that the uncertainty over the future of state-controlled fuel and energy prices also posed a risk to inflation.
Jacqui Douglas, Senior Global Strategist at TD Securities also expects that “the post-meeting communique will leave the door open for a further and final 25bp hike at the following meeting.”
The rise in inflation could diminish support for Brazil's president Dilma Rousseff ahead of the elections scheduled for October, and consequently push her towards adoption of fiscal stimulus.
According to the BBH Global Currency Strategy Team: „The consolidated budget balances have stabilized in recent months, but at far weaker levels than in the past. Fiscal slippage was a major factor behind S&P’s recent one notch downgrade to BBB-, but the stable outlook lines up with our view that further downgrades below investment grade are unwarranted now.”
Economic data
There was a slew of Brazilian economic data released on Tuesday and Wednesday, just before the central bank's monetary policy announcement.
On Tuesday Brazil's Ministerio de Comercio informed that the trade deficit of USD -2.125B recorded in February shifted to a USD 0.112B surplus, slightly higer than the expected USD 0.10B.
February Industrial Production data, released on Wednesday, showed a 5% increase year-on-year, compared to the 2.2% drop in January. On a monthly basis industrial output grew 0.4%, down from the 3.8% rise.
Technicals
On Tuesday USD/BRL rose by 0.17% to 2.2697. The daily FXStreet Trend Index was slightlly bearish, and the OB/OS Index oversold. RSI was neutral at 29 at the last close. Daily 2-StDev Volatility Bandwidth was expanding at 43 pips, with ATR (14) expanding at 19 pips. The 1D 200 SMA was at 2.3072, while the 1D 20 EMA at 2.3144.
The BBH Global Currency Strategy Team believe that „a stronger real will be accepted as part of the battle against inflation, and that policymakers will not try to prevent this.”
“So far, there has been no protest whatsoever from officials regarding the drop below 2.30 for USD/BRL. The 2.25 level has been tested but not yet decisively broken. If the rest of EM currencies rally, as we expect, then BRL will most likely break below 2.20.”