巴黎银行-新兴市场-外汇策略-软汇率传导至通胀-20191022-8页_482kb

Brazil: Soft FX Pass-Through to Inflation

Core Content

This report discusses the relationship between the Brazilian Real (BRL) depreciation and its impact on inflation, focusing on the current economic conditions and the behavior of FX pass-through. It highlights the limited inflationary pressure from recent BRL depreciation, despite the currency's decline, and explores the factors that contribute to this phenomenon.

Key Findings

• BRL Depreciation and Inflation Impact: The BRL depreciated in Q2 and Q3 of 2019, but the impact on inflation has been muted.
• FX Pass-Through Dynamics: The pass-through of FX movements to inflation is not linear and is influenced by multiple factors:
  • Economic State: The pass-through is smoother when the economy is below potential.
  • Inflation Expectations: Anchored inflation expectations limit the pass-through effect.
  • Direction and Size of FX Moves: The impact of FX changes is asymmetric, with depreciation having a stronger effect than appreciation.
• Quantitative Estimates:
  • The FX pass-through from depreciation is estimated at 8% (or 0.80pp for every 10% depreciation).
  • The linear pass-through model estimates a 8.0% impact, but the actual pass-through can vary based on economic conditions.
• Economic Context:
  • Real GDP is still below potential.
  • Capacity utilisation is 15pp below the previous peak.
  • Unemployment remains at double-digit levels.
  • The Brazilian economy is estimated to be 2pp below potential GDP.
• Commodity Prices: A decline in commodity prices, especially food, partially offsets the FX impact on inflation.
• Future Outlook: The current economic conditions may delay the FX pass-through effect, but if the BRL continues to underperform, there could be an unexpected inflationary impact in the future.

Strategy View

• BRL Bullish Outlook: The strategy team at BNP Paribas remains bullish on the BRL, with the BEER model indicating significant appreciation potential.
• Current Position: They are currently long BRL.
• Funding Strategy: The team is funding the long BRL position using NZD, as it is a commodity currency with low carry.
• Trade Details:
  • Strategy: Short NZDBRL via NDF (maturity: 18-Dec-19).
  • Allocation: USD25mn.
  • Target: 10%.
  • Stop-Loss: 5.5% (carry included).

Important Disclosures

• The document is a marketing communication and not independent investment research.
• It is intended for Relevant Persons as defined under MiFID II and other financial regulations.
• No Investment Advice: BNPP does not provide investment, financial, legal, or tax advice.
• Confidentiality: The document is provided on a strictly confidential basis and may not be distributed without prior consent.
• Conflict of Interest: BNPP may have financial interests in the securities or entities mentioned, and may engage in transactions inconsistent with the views expressed.

Summary

The BRL depreciation in Q2 and Q3 of 2019 has not significantly impacted inflation, primarily due to anchored inflation expectations, economic conditions below potential, and falling commodity prices. The FX pass-through to inflation is non-linear and asymmetric, with depreciation having a stronger effect than appreciation. Current estimates suggest an 8% pass-through from depreciation, but the economic context may smooth this impact over time. The strategy team remains bullish on BRL, with a long position funded through NZD. The document serves as a marketing communication and contains important disclosures regarding conflicts of interest, confidentiality, and investment risks.