May 17, 2018 / 1:45 PM / 10 months ago

EMERGING MARKETS-Brazil yield curve flattens after central bank holds rates

    By Bruno Federowski
    BRASILIA, May 17 (Reuters) - Yields on short-term Brazilian
interest rate future contracts jumped on Thursday after the
central bank unexpectedly left its benchmark rate untouched,
while the Brazilian real outperformed its peers.
    The bank kept the Selic rate at 6.50 percent, contradicting
widespread expectations of a 25 basis-point cut.
    Policymakers attributed the decision to "the recent change
in the balance of risks to prospective inflation," which
economists widely understood as a reference to the recent global
emerging-market currency selloff.
    Short-term rate yields spiked in early trading as
investors adjusted their bets following the interest rate
surprise. Long-term yields slipped due to expectations that
tighter monetary policy in the short-term may allow the central
bank to hike rates less than expected in the future.
    The Brazilian real also found some support in the
central bank move, weakening less than its Latin American peers
as emerging markets extended their recent losses across the
    "Markets will take the surprising decision as a sign that
the central bank is concerned with the current emerging market
environment and its implications on the pace of depreciation,"
economists at Nomura Securities wrote in a report.
    "In other words, market could read the decision as a sign
that the central bank is committed to take further steps to
avoid outsized pressure" on the currency.
    The central bank has already sold currency swaps to cushion
the currency's decline, which has been underpinned by concerns
that a widening U.S. fiscal deficit and accelerating inflation
could bump up U.S. interest rates.
    Yet Nomura economists said the relief in the Brazilian real
is likely to be temporary as the October presidential elections,
set to be the most hard-to-predict in decades, weigh on appetite
for the nation's assets.
    "We expect the real to return to its underperformance path
in the short term, unless there is a clear change in the
presidential election landscape, with signs that a pro-market
candidate is likely to win," the report said.
    Key Latin American stock indexes and currencies at 1330 GMT:
 Stock indexes                                 daily    YTD %
                                                   %   change
                                   Latest     change  
 MSCI Emerging Markets               1148.24   -0.59    -0.29
 MSCI LatAm                          2806.08    -0.7    -0.08
 Brazil Bovespa                     85356.46   -1.36    11.72
 Chile IPSA                          5730.72    0.05     2.99
 Chile IGPA                         28977.29    0.07     3.56
 Currencies                                    daily    YTD %
                                                   %   change
                                      Latest  change  
 Brazil real                          3.6789   -0.03    -9.94
 Mexico peso                         19.7110   -0.72    -0.06
 Chile peso                           631.51   -0.17    -2.67
 Colombia peso                       2872.34   -0.46     3.82
 Peru sol                               3.27   -0.21    -1.01
 Argentina peso (interbank)          24.1000    0.79   -22.82
 Argentina peso (parallel)              24.9   -0.40   -22.77
 (Reporting by Bruno Federowski
Editing by Susan Thomas)
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