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Friday, May 27, 2022

Brazilian operators bet on the end of rate hikes

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(Bloomberg) — Traders in Brazil are betting the central bank will stick to its plan to end the tight money cycle in May, even after the latest inflation reading beat economists’ estimate on Friday. .

Rate swaps retreated today, extending Thursday’s decline, despite a 0.95% monthly rise in consumer prices through mid-March, which beat the median estimate of 0.85 of economists surveyed by Bloomberg. % Brazilian real strengthens.

Traders are lowering bets on a longer monetary tightening cycle after central bank chief Roberto Campos Neto said Thursday that a further rate hike in June is not the most likely scenario. After raising rates by 975 basis points over the past year, policymakers have signaled they could end the cycle with a final tightening in May.

Markets are still reacting to the central banker’s comments, said Jason Vieira, chief economist at Infinity Asset Management in São Paulo.

Campos Neto had said before Friday’s report that inflation could exceed expectations in the short term, but would still peak in April and decline after that. Those comments are likely leading traders to bet that the mid-March figures won’t change the bank’s planes.

Traders have halved their bets on additional hikes after May since last week’s rate decision, seen as dovish. The DI curve now discounts a 50 basis point premium to cover the risk that the central bank will have to extend the cycle.

Meanwhile, the Brazilian real continues to rise, adding as much as 1% on Friday to its year-to-date rally. Although swaps are falling, investors say the currency’s carry is still very high and enough to continue to attract foreign investors.

“The carry is already very succulent,” said Valter Filho, a currency trader at Galápagos Capital in São Paulo. “Of course, the higher the rate goes, the better for the currency, but Brazil has raised it so much that it doesn’t make a big difference anymore.”

original note:

Brazil traders look beyond inflation to bet on an end to rate hikes

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