BRAZIL: DI Rates End Higher With USD And Domestic Electoral Scene

(RTTNews) - The one-day interbank deposit futures rates (DI rates) in Brazil ended higher, as the locally traded U.S. dollar rose sharply. The political risk in Brazil triggered the recomposition of premiums, with the forward curve also being pressed by better-than-expected industry figures.

In the foreign exchange market, the locally traded U.S. dollar rose almost 2%, in the range of R$ 3.81, even after two additional auctions of foreign exchange swap made by the Brazilian Central Bank.

"The BCB's new approach to foreign exchange is better," said a treasury director at a foreign bank. For him, the unexpected announcement of new forex swap auctions during the trading session was more "powerful."

"However, if they do not change the speech on interest rates, the market should continue to test," he said.

The external conditions - most hostile to emerging countries - and the uncertainties surrounding the electoral scenario in Brazil may lead the monetary authority to revise its monetary policy strategy.

"The devaluation of the Brazilian real can continue and the BCB's next step may be to raise the basic interest rate in order to rebalance the risk premium on the curve," he added.

This reading was reinforced by the higher than expected advance of the industry, which reduced bets that the central bank could resume the cycle of cuts in the basic interest rate.

"The good performance of industrial production in April may help offset some of the negative figures of economic activity that should be observed, especially in May," the Banco MUFG Brasil analyst team said in a report.

The January 2019 DI contract rate was at 6.90%, from 6.71% at the previous session, while the January 2020 DI rate ended at 7.89%, from 7.62%. The January 2021 DI contract rate was at 9.05%, from 8.76%.