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By: Dimitra DeFotis
Siobhan Morden, Latin America fixed-income strategist at Nomura, writes:
” … The strategy implications of a carry trade suggest bias towards the higher carry returns of the local bond markets. This requires high conviction of stable external risk that is supportive for net U.S. dollar inflows and further real currency appreciation without central bank intervention. The inflation linkers are the preferred instrument among local market options for the low break-even inflation at 19% (BONCER’21/ ARGTES’18) versus inflation expectations of 20%-21% over the next 12 months and benchmark liquidity in the ARS Discounts and the BONCER’21. The upside risk to growth also favors a small long position in GDP warrants as prices may edge higher as economic growth improves over coming months … There has already been the beginning of an economic recovery with a slower decline for retail sales, a bottoming of the monthly economic activity, month-over-month improvement in industrial production, higher cement deliveries and improving consumer purchasing power from lower inflation and consumer confidence also starting to improve with future expectations higher than current expectations.
The external environment remains supportive on expectations of an economic recovery in Brazil, resilient commodity prices as well as increasing volume for agricultural exports. There is clearly a shift towards election year stimulus with the upward revision to the fiscal target next year and a net real increase in spending. There are still a wide range of expectations for GDP growth ranging from 3.5% to 5.0% for next year with the conviction on the momentum dependent upon economic data over the next few months. … The fiscal target of a primary deficit of 4.2% of GDP now appears more realistic versus the original target of 3.3% of GDP …”
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