巴黎银行-新兴市场-外汇策略-软汇率传导至通胀-20191022-8页_556kb

Brazil: Soft FX Pass-Through to Inflation Summary

Core Content Overview

This report discusses the relationship between the Brazilian Real (BRL) depreciation and inflation in Brazil, focusing on the limited impact of currency movements on inflation so far in 2019. It also outlines the strategy view and relevant disclosures for the report.

Key Messages

• BRL Depreciation and Inflation: The BRL depreciated in Q2 and Q3 2019, but the impact on inflation has been muted.
• Factors Limiting FX Pass-Through:
  • Anchored Inflation Expectations: These reduce the immediate pressure from FX movements.
  • Real GDP Below Potential: Brazil's economy is still underperforming, which leads to a smoother and less direct pass-through of FX changes to inflation.
• FX Pass-Through Coefficient: The pass-through from FX depreciation to inflation is estimated at about 8%, or 0.80pp for every 10% depreciation, with a slower impact compared to a linear model.
• Non-Linear and Asymmetric FX Pass-Through:
  • The impact of FX changes on inflation is not linear and varies depending on the direction of the exchange rate move, the state of the economy, and inflation expectations.
  • Depreciation tends to have a higher pass-through (around 10%) than appreciation (around 5%).
• Future Outlook: If the BRL continues its underperformance, there could be an unexpected increase in FX pass-through. However, the current economic conditions suggest that the impact will remain limited in the near term.
• Currency Appreciation Projection: The BRL is expected to appreciate back to below the 4.00 level, which would help maintain the favorable inflation scenario.

Inflation Projections

• 2019 Inflation Projection: 3.10%
• 2020 Inflation Projection: 3.50%

Strategy View

• BRL Bullish Outlook: The strategy team remains bullish on the BRL, believing there is substantial room for appreciation.
• Current Position: The team is long BRL and is funding this position using NZD, which is a commodity currency with exposure to China and low carry.
• Trading Strategy:
  • Short NZDBRL via NDF (Maturity: 18-Dec-19)
  • Allocation: USD25 million
  • Target: 10%
  • Stop-Loss: 5.5% (carry included)

Key Figures and Data

• USDBRL Exchange Rate Changes (Q3 2018 to Q3 2019):
  • Q3 2018: 3.95
  • Q4 2018: 3.81
  • Q1 2019: 3.77
  • Q2 2019: 3.92
  • Q3 2019: 3.97
• Quarterly FX Change (%, q/q):
  • Q3 2018: 9.4%
  • Q4 2018: -3.4%
  • Q1 2019: -1.2%
  • Q2 2019: 4.1%
  • Q3 2019: 1.3%

Important Disclosures

• This document is non-independent research and is intended for Relevant Persons as defined by MiFID II.
• It is not investment research and not subject to any prohibition on dealing ahead.
• No guarantee of accuracy or completeness of the information provided.
• No advisory or fiduciary duties are assumed by BNPP.
• No assurance that any transaction will be entered into on the terms indicated.
• Confidentiality: The document is intended for selected recipients only and must not be copied, reproduced, or distributed without prior written consent.

Additional Notes

• The report includes performance data based on back-testing, which is for illustrative purposes only.
• Options and ETFs discussed are complex instruments and may involve high risk.
• US Securities Law Compliance: Certain securities may not be registered and are only available to Qualified Institutional Buyers (QIBs) or non-US persons under Regulation S.
• Canadian Compliance: The document is subject to specific Canadian regulations and is only available to certain permitted clients or qualified parties.

Conclusion

The current economic conditions in Brazil, including anchored inflation expectations and real GDP below potential, are dampening the FX pass-through effect. While the BRL has depreciated, the impact on inflation has been limited. The strategy team remains optimistic about BRL appreciation, which could help maintain the current favorable inflation outlook.