20170112-法国巴黎银行-Brazil_IR_DI__Too_much_premium_or_too_much_scepticism__The_Sequel_11页_275kb

Summary of "Brazil IR/DI: Too much premium or too much scepticism…? The Sequel"

Core Content

This document is a follow-up to a previous analysis published on 19 September 2016, which examined the DI (Diretório de Indices) curve in Brazil and its implications for monetary policy expectations. The current analysis updates the findings as of the present date and evaluates the market's pricing of interest rate expectations in the context of the ongoing monetary policy cycle.

Main Findings

• Market Underestimation of Easing Cycles: The market has historically underestimated the size of easing monetary policy cycles. In the past nine cycles since 2004, the average underestimation was 363 bps.
• Inconsistent Prognosticative Power of DI Curve: The DI curve has not consistently predicted the final outcomes of monetary policy cycles, often diverging significantly from the actual results.
• International Shocks and Market Response: Market participants have frequently underrated the impact of international shocks (e.g., 2008-09 financial crisis, 2011-12 Greek crisis) on central bank decisions, as reflected in the DI curve.
• Current Market Expectations: The market is now pricing in ~100 bps more easing than when the current cycle began. However, this is still considered insufficient based on BNP Paribas economists' projections.
• BNP Paribas Forecast: The economists at BNP Paribas believe the terminal rate for the current easing cycle will be 9%, indicating a more aggressive easing path than what is currently priced in the market.
• DI Strategy Position: The firm continues to receive DI Jan-23, which has yielded a +121 bps profit-to-loss (PnL) so far. The strategy is based on the belief that the risk premium is still declining despite political noise.

Key Information

• DI Curve Analysis: The DI curve was analyzed for nine monetary policy cycles since 2004, with the term structure examined one week before the start of each cycle. The curve was also reviewed after the initiation of the cycle to assess how quickly it adjusted.
• Risk Premium Consideration: While the DI curve includes both forward-looking monetary policy expectations and risk premium, the firm argues that for maturities shorter than two years, the premium is still significant.
• Comparison of Ex-Ante Expectations: The firm compares the expectations from traders and economists to assess the risk premium. A larger divergence between the two suggests a higher premium.
• Historical Data: The firm reports that in previous easing cycles (e.g., 2005, 2011), the market underestimated the easing by an average of ~400 bps. In contrast, hiking cycles were underestimated by ~200 bps on average.
• PnL Performance: The firm's DI trading strategy has resulted in a total PnL of +402 bps since January 2016, with several trades closed at different points in time, including DI Jan-18, DI Jan-19, and DI Jan-25.

Strategy Overview

• DI Jan-23 Position: The firm maintains a position in DI Jan-23 due to the belief that the risk premium is still declining.
• Market Trends: The DI curve is expected to continue moving downward, with the long end of the curve showing a clear downward trend.
• Automatic Debt Dynamics: The firm highlights the co-movement between longer DI tenors and Brazil's automatic public debt dynamics, reinforcing the view that the curve will continue to flatten.

Legal and Distribution Notice

• Non-Objective Research: This document is classified as non-objective research and is not independent investment research.
• Marketing Communication: It is a marketing communication and not intended as investment advice.
• Confidentiality: The document is for internal use and may not be reproduced or distributed without prior written consent.
• Conflict of Interest: BNP Paribas and its affiliates may have conflicts of interest due to their involvement in transactions, advisory roles, or market making activities related to the instruments discussed.
• Disclaimer: The document does not constitute an offer to sell, a solicitation of an offer to buy, or a prospectus. It is not intended to provide investment, legal, or tax advice.

Contacts

For further information, contact the following:

United States Disclosures

• Options Risk: Options are complex and risky instruments, suitable only for sophisticated investors. Proper risk disclosure documents are required for access.
• ETF Risk: ETFs carry risks such as tracking error, currency risk, and credit risk. BNP Paribas may have conflicts of interest due to its market making and advisory roles.
• Unregistered Securities: Certain securities discussed may not be registered under US securities laws and are considered restricted.