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BRAZIL: DI Rates Rise Amid Low Support To Pro-reform Presidential Candidates

(Agencia CMA Latam) - The one-day interbank deposit futures rates (DI rates) in Brazil ended higher, tracking the locally traded U.S. dollar and after an electoral survey showed that market-friendly presidential candidates lost support from voters in the last few months.

By the end of the day, the January 2019 DI contract rate rose to 6.36%, from 6.315% on Friday, while the January 2020 DI rate increased to 7.41%, from 7.29%. The January 2021 DI contract rate was at 8.48%, from 8.37%. The locally traded U.S. dollar was 0.83% up near the close of the session, at R$ 3.63.

According to Ignacio Crespo, an economist at Guide Investimentos, the electoral race boosted the greenback, in spite of the dollar mixed performance against other emerging market currencies, and that spilled to DI rates, which were already rising on the back of news from abroad.

Crespo highlighted the fact that Geraldo Alckmin, Sao Paulo's state governor, continued to show a weak performance compared to other presidential candidates in the electoral survey.

"That keeps a caution bias over local markets," he added.

Investors prefer Alckmin among other presidential candidates because he endorses economic and fiscal reforms cheered by financial agents.

A market strategist from a local asset manager said that the electoral scenario in Brazil remains uncertain and that traders are becoming more defensive, only a few days before the central bank monetary decision. "Markets are telling the central bank not to cut the Selic [Brazil's benchmark interest rate] again by 25 basis points."

He added that even with a placid inflation scenario and a gradual pickup in economic activity, "the foreign exchange and interest rates curve dynamics show that, maybe, it would be more prudent to end Selic's easing cycle at 6.5%."

Traders said that the yield curve ended today's session pricing a 60% probability of a 25 basis points cut to the Selic on Wednesday, from around 70% last Friday.

by Agencia CMA Latam

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