October 20, 2016 / 12:32 PM / 2 years ago

EMERGING MARKETS-Brazil rate futures rise on small central bank cut

By Bruno Federowski
    SAO PAULO, Oct 20 (Reuters) - Yields paid on Brazilian
interest rate futures rose in early Thursday trading after the
central bank disappointed some traders with a
smaller-than-expected interest rate cut. 
    Brazil's central reduced its benchmark Selic rate by 25
basis points after the market closed on Wednesday to 14 percent,
the first cut in four years. 
    Traders had largely expected a rate cut, with a sizeable
minority betting on a 50-basis-point reduction after
weaker-than-expected economic activity data and a surprise drop
in fuel prices. 
    The bank said in its post-decision statement that it could
opt for steeper cuts in the future if the pace of disinflation
accelerates and Congress presses ahead with the approval of
austerity measures.
    UBS economists led by Guilherme Loureiro said they expect
those conditions to materialize in the near future, paving the
way for a 50 basis point cut in November.
    They kept their forecasts that the Selic rate will close
2017 at 10.5 percent, "with a high chance of falling to single
digits later in this easing cycle."
    The yield curve implied about-even chances of a 25 basis
point or a 50 basis point cut at the central bank's November
policy meeting, traders said. 
    According to Paulo Nepomuceno, head of fixed income at the
Coinvalores brokerage, rate futures priced Selic rate of 11.50
percent at the end of 2017, compared to 11.00 percent a day
earlier. <0#2DIJ:>
    Hopes that the central bank's cautious approach could lure
capital into Brazil helped support the Brazilian real.
    The Mexican peso  touched its strongest level
in six weeks after the final debate of the U.S. presidential
election on Wednesday offered Republican candidate Donald Trump
no clear boost in his bid to win the White House. 
    The peso, which has been the chief proxy for market pricing
of Trump's chances in view of his promises to impose tough
limits on immigration, firmed to 18.455 per dollar in Asian
trading after the debate's conclusion, its strongest since Sept.
8. The currency later gave up those gains, weakening 0.3
percent, after European traders arrived at their desks. 

    Key Latin American stock indexes and currencies at 1200 GMT:
 Stock indexes                              daily %    YTD %
                                             change   change
 MSCI Emerging Markets              913.74     0.04    15.01
 MSCI LatAm                        2591.16     0.13    41.42
 Brazil Bovespa                   63410.91    -0.15    46.28
 Currencies                                 daily %    YTD %
                                             change   change
 Brazil real                        3.1584     0.29    24.97
 Mexico peso                       18.5760    -0.29    -7.25
 Chile peso                          665.5    -0.02     6.64
 Colombia peso                      2915.2     0.03     8.72
 Peru sol                            3.381     0.00     0.98
 Argentina peso (interbank)        15.1850     0.16   -14.50
 Argentina peso (parallel)           15.58     0.39    -8.41

 (Editing by Bernadette Baum)
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