Short-term interest soar, real gains ground after Copom's decision
Brazilian assets reacted strongly to the 75 basis points increase in the Selic, Brazil's benchmark interest rate, already in Thursday's early trading hours. The surprise at the harsher tone of the minutes of the Central Bank's Monetary Policy Committee (Copom) caused the real to gain ground against the dollar, even amid the greenback's firm appreciation abroad. In addition, the difference between long-term and shorter-term rates has narrowed.
The surprise at the decision made several banks adjust their strategies for Brazilian assets in light of the assessment that the monetary authority's stance is likely to help anchor local markets. The intensity of the movement is clear in short-term interest rates as over 2 million interbank deposit (DI) contracts for January 2022 were traded, up from an average of 678,000 for the year so far. In addition, the DI rate for January 2022 jumped 0.345 percentage point to 4.595%, while the DI rate for January 2027 dropped to 7.87% from 7.88%.
"The interest rate hikes should give a credible signal to investors in the fixed income markets that the Central Bank is following the right path of monetary policymaking," J.P. Morgan's strategists Carlos Carranza, George Christou and Gisela Brant say, referring especially to long-term interest rates. "Of course, fiscal signals are also important and the situation on that front is still worrisome, but that has already been reassessed with the recent emergency PEC [constitutional amendment proposal]." The emergency PEC, passed by Congress on Monday, creates triggers to control government spending and made possible paying again an emergency aid to informal workers.
J.P. Morgan's analysts even have a "constructive" outlook on Brazilian assets from now on and believe that the decision should reduce volatility further ahead. For the exchange rate, for instance, the strategists estimate that for every 100 bp increase in the basic interest rate there is a reduction of up to $2.3 billion in short positions on the real by foreign investors on the exchange B3, "especially because the real is the cheapest emerging currency according to our equilibrium models."
Paul Molander, emerging markets strategist at British bank NatWest, defends betting on the appreciation of the real. "While we are skeptical of Brazilian assets in the long term, especially because of the increased noise related to the 2022 elections, we believe that in the coming months the real will have an opportunity...
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