20181008-法国巴黎银行-Brazil__The_day_after_11页_580kb

Brazil: The day after Summary

Core Content

This document, produced by Banco BNP Paribas Brasil S.A., provides an analysis of the Brazilian financial market following the first round of the presidential election on 7 October 2018. It outlines the current market outlook, technical positions, and investment strategies for various financial instruments, including foreign exchange (FX), interest rates (DI), and credit default swaps (CDS).

Main Points

Election Results

• Jair Bolsonaro won the first round with 47% of valid votes, but did not secure an outright victory, leading to a runoff on 28 October 2018.
• The market is expected to show support for Brazil risk assets in the short term.

Technical Position Monitor

• Local macro funds have deleveraged their Brazil risk assets allocation.
• DI positioning is almost flat, while there is core long equity positioning hedged with a long USDBRL.
• The local derivatives market shows a record high allocation in long US dollars.

FX Models

• FEER model suggests the BRL is undervalued with a theoretical equilibrium rate of 3.02, significantly lower than the current market rate.
• BEER model implies a fair value of USDBRL at 3.61.
• The BRL is expected to appreciate against a basket of CLP, EUR, and AUD.

DI Model

• There is substantial premium embedded in the Brazil DI curve, especially for longer tenors.
• The firm continues to receive rates in the short end and belly of the DI curve using two strategies:
  • Receive Jan22sJan23s FRA
  • Receive Jan20sJan21s FRA

CDS Strategy

• The 5Y CDS is expected to breach 200bp.
• The firm holds a short 5Y CDS strategy, anticipating a 70bp compression in the CDS spread.

Market Scenarios

• Short squeeze is expected in USDBRL due to lack of marginal dollar buyers.
• BRL is anticipated to rally to 3.50 in the next few months.
• DI is expected to rally by 100bp in the coming weeks.
• CDS is expected to breach 200bp.

Active Strategies

• Interest Rates:
  • TR-8228: Pay Brazil Cupom Cambial Nov18sJul19s FRA
  • TR-7752: Receive Colombia IBR 2Y
  • TR-7583: Receive Chile CLPxCAM 18M
  • TR-7396: Receive Brazil DI Jan22sJan23s FRA
  • TR-7182: Receive Brazil DI Jan20sJan21s FRA
  • TR-7028: Receive Mexico TIE 1Y1Y
  • TR-6912: Pay Mexico TIE Fly 2Y-5Y-7Y (Pay the belly)
  • TR-4533: Receive Mexico TIE 5Y / Pay Colombia IBR 5Y
  • TR-4011: Receive Mexico TIE 5Y5Y spread over US Swap
• FX:
  • TR-8256: Short USDZAR via 3m Fwd
  • TR-8215: Short USDARS via 1m NDF
  • TR-8036: Short EURMXN via 3m Fwd
  • TR-7630: Short EURCLP via 3m NDF
  • TR-7164: Short USDCOP via 3m NDF
  • TR-6192: Short USDPEN via 3m NDF
  • TR-2483: Long BRL against a basket (CLP, EUR & AUD) via 1m NDF
• Hedging Structures:
  • TR-8108: Long USDBRL OT 4.70 / Short USDBRL OT 5.40 (2x)
  • TR-7244: Long USDBRL OT 3.30
  • TR-6998: Long USDBRL CS (1x2) 4.00/4.40
• Bonds/Credit:
  • TR-8239: Sell Turkey 5Y CDS
  • TR-7856: Buy Argentina 5Y CDS vs Sell 5Y Brazil/Mexico/Colombia CDS
  • TR-7552: Long Peru Soberanos 2026s unhedged
  • TR-7476: Sell Brazil 5Y CDS

Key Information

• The BRL is seen as bullish in both short and long-term models.
• The DI curve still has premium, especially in the longer tenors.
• The CDS market is expected to compress by 70bp.
• Local macro funds have deleveraged their exposure, while non-residents have low share in local public debt.
• The firm is actively managing its positions in various financial instruments, including FX, DI, and CDS.
• The runoff on 28 October 2018 is expected to drive market sentiment towards BRL appreciation.
• The new administration will be monitored for its ability to implement fiscal reforms in December 2018.

Conclusion

The document highlights a bullish outlook for the Brazilian real (BRL) and interest rate instruments (DI), while shorting CDS positions for potential compression. It also emphasizes the importance of the runoff election and the potential impact of fiscal reforms on the market. The firm is maintaining a diversified strategy across FX, DI, and CDS instruments, with active monitoring and adjustments based on market conditions and model outputs.