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Financial News: BRAZIL: DI Rates End Higher With Central Bank

BRAZIL: DI Rates End Higher With Central Bank Intervention

06/13/2018 - 18:48:00 (RTTNews)

(RTTNews) - The one-day interbank deposit futures rates (DI rates) in Brazil ended higher, pressured by the actions of the Brazilian and U.S. central banks. The currency swap auctions amortized the locally traded U.S. dollar's impact on the Fed announcement, which revised the base scenario and forecasts two more monetary tightening this year but led to a dipping in the forward curve.

"The market reacts to a higher interest rate scenario in the U.S. in the short term," said a derivatives trader at a national brokerage firm. For him, more important than the increase in U.S. interest rates today, was the Fed signaling two more rate hikes this year. "Probably in September and December."

For Infinity Asset chief economist Jason Vieira, the surprise with the Fed's changing scenario explains the local central bank's position against the U.S. dollar. "There is an obvious high impact, but [central bank's performance] was more in the sense of amortizing strong advances," he said.

Even so, Vieira notes that the domestic environment is favored by low inflation, which should not require a rise in the Brazilian basic interest rate (Selic rate) in the near future.

However, for a treasury director of a foreign bank, the strong exchange intervention of the Brazilian Central Bank with the U.S. dollar around R$ 3.70 is creating a distortion in the future interest rate market.

"The strong pressure on the curve is an indication of a large imbalance and this process ends with higher rates and weaker local currency," he said.

The January 2019 DI contract rate was at 7.23%, from 7.15% at the previous session, while the January 2020 DI rate ended at 8.88%, from 8.67% on the same comparison. The January 2021 DI contract rate was at 9.94%, from 9.75%.

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