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TALKING POINTS – BRAZIL CENTRAL BANK, BRL, IBOVESPA, PENSION REFORMS

  • BRL and Ibovespa jump on central bank rate decision, commentary
  • Pension reforms, slower global growth, trade wars a major concern
  • US-China trade spat and weak economic activity pressuring policy

See our free guide to learn how to use economic news in your trading strategy!

The Brazilian Real and Ibovespa futures jumped after the 9-member Copom council in Brazil’s central bank unanimously decided to keep the Selic rate at the all-time low of 6.50 percent. Local assets rallied after board members stated that inflationary pressures are symmetric, and this likely cooled rate cut expectations and sent the Real higher.

BRL, Ibovespa Futures Gain

Chart Showing BRl, Ibovespa

This appears to be part of a broader trend whereby the expectations of dovish undertones from central bank officials are met with surprise by investors when policymakers announce a comparatively-less dovish outlook. The most recent examples was this month’s FOMC meeting and the RBA rate decision earlier this week.

The Brazilian monetary policy statement revealed that board members are showing greater concern over world and local growth prospects in part due to “the global outlook [remaining] challenging”. The sudden deterioration in US-China trade relations this week caught markets off guard and pressured emerging market economies and other cycle-sensitive assets.

The cautionary outlook from the central bank is also due to the slower growth in local economic activity at the tail end of 2018 which continued into the early stretches of 2019. One needn’t look much further than this month’s release of industrial production data which significantly undershot analysts’ expectations. Slower growth out of China – one of Brazil’s biggest clients for its iron-exporting sector – continues to pressure the Brazilian economy.

Furthermore, local risks over the volatility of President Jair Bolsonaro’s pension reforms continues to rattle local financial markets due to the weight they carry for South America’s largest economy. Much like Brexit and the BoE, the Brazilian central bank’s monetary policy is in large part catered toward whether the pension reforms can pass with many of the key elements intact.

Learn more about how Bolsonaro’s pension reforms may unleash a flood of capital into Brazilian assets.

FX TRADING RESOURCES

--- Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter