Brazil an Overview
In this report we are going to see how the interest rate curve has changed over the time and its
cause/effects.
What type of curve do we, FF as an organization, usually prefer to trade?
The ones where the correlation is fairly visible between contracts, hedges seem to work fine and there is
an observable lead/lag (statistical arbitrage) between the contracts throughout the curve that provides
ample opportunities. One of the example of that kind of curve is as given below.
What do we look for choosing a contract or trade?
Volatility and Liquidity are the 2 major factors which are to be kept in mind while choosing a contract/scrip
to trade, in DI1 markets as we go farther and farther the liquidity decreases and volatility in the curve is
based on short term/long term actions taken by Central bank of Brazil and the government. Middle part
of the curve seems to be the sweet spot where there is ample liquidity and volatility is generally present.
Different traders like to trade different parts of the curve according to their style and use different
structures to interact with it no we are going to see how the curve overall has changed .
This is the curve from mid-August to mid-October [fig 1], see how the curve shape is more or less same
but it appears to be shifted a bit higher as we move ahead on calendar. It appears for the time being that
Brazil an Overview
rate cuts (Which are going to happen in further future when the economy is fairly stable) are not priced
only short term action that has to be taken is to control inflation.
(Fig1)
Why did curve react the way it did?
As we see here in [fig2] the front part of the curve here is steepening and the back part is flattening as
the inflation appears to be raging and there is need for quicker monetary adjustment for guaranteeing
the control of inflation. Market is expecting monetary tightening of bigger extent (150bps) than
forecasted in previous meeting (100 bps).
(Fig 2)
Brazil an Overview
What has happened after the 150bps price hike?
Market also started pricing in hikes from late October, there were speculations of rate cuts ranging from
time frame mid-2022 to early-2023. So the curve at the back part started reacting to it as we can see in
[fig 3] at that time jan23and jul23 contracts were the highest part of the curve.it appears we are
observing an inflection in the curve from here on now inflection point being jan23-jul23 part in curve.
(Fig3)
What has happened since past month?
Now we can see the curve has a kink at jan23-jul23 part, in the series. Does it mean we can look it as 2
separate parts in the curve .Now question is, how long can it stay this way? What could possibly change
the shape of this curve and how?
Brazil an Overview
Going forward how the inflation data turns out to be (for major economies as well as Brazil) a
figure to keep a close eye on.
If major economies start to make monetary adjustment with the greater pace than anticipated,
such actions could play out in Brazil too.
Brazil Inflation Rate at 18-Year High
The annual inflation rate in Brazil increased to 10.74 percent in November of 2021 from 10.67
percent in October but below market expectations of 10.88 percent. It was the highest reading
since November of 2003, as the reopening of the economy, supply chain issues, weaker
currency, and spending cap troubles continued to weigh on prices.
Brazil an Overview
Here are the graphs present for you to look in continuity
Brazil an Overview