Forex Flash: USD/BRL to rise to 1.97 in Q1 before rising easing to 1.95 in Q2 – TD Securities

The Brazillian Central Bank is not ready yet to hike interest rates as more time is required to assess the complexity of both the domestic and external environments, according to TD Securities analysts' interpretation of the March meeting minutes. “Thus, we continue to see scope for disappointment, whereby market-implied expectations anticipate very aggressive tightening in terms of resumption and magnitude of the cycle”, wrote analyst Cristian Maggio, indicating a lot more hawkish minutes this time in comparison to January.

“The Copom repeatedly highlighted the strength and the resilience of inflation, and its negative impact on growth potential, proving their discomfort with the current price dynamics”, Maggio wrote, adding that “they now see the IPCA inflation higher vis-à-vis the January projections and above the 4.50% mid-point of the target range both in 2013 and 2014, whereas in January they signalled that CPI would be only ‘slightly above’ target".

TD Securities analysts believe the BCB’s hawkishness may just be a scam: "Should this be the case, rate hikes will start later than expected (market-implied expectations have already fallen to +17bp in 1m from 29bp yesterday), while the magnitude of the cycle could also be revised lower (12m expectations now suggest +194bp against +202bp yesterday)", continued Maggio. "These developments should support a somewhat weaker BRL, in line with our forecast of 1.97 in Q1, and stronger at 1.95 in Q2 when a first hike is likely to materialize"; he concluded.