Forex Investment and Currency Trading

Brazil: The Monetary Policy Committee (Copom) minutes from the latest meeting confirm the difficulties of being a central banker in the present environment. Copom kept the overnight Selic rate unchanged at 13.75% on October 28-29. This follows four rate hikes in 2008 and breaks a rate tightening cycle that many in markets believed would extend to a series of as much as 400bps in hikes. The global financial crisis factored prominently in the decision process with the freeze in credit markets being deemed to account for: 1) dented consumer and business confidence; 2) a higher level of uncertainty; and 3) a more fragile balance of payments position. The authorities noted a continued expectation for growth to slow with lending activity falling substantially during the month of October. The Copom also cited that relatively high inflation remained a challenge—despite an ease in international inflation pressures due to lower commodity prices. Uncertainty and competing economic forces will likely dominate in the near term and keep the Copom on hold at the next meeting scheduled for December 9-10. However, the tightening of credit and prospect for a substantial slide in economic activity should push the Copom to cut rates by at least 100bps into 2009.

October IPCA inflation registered 6.41% yoy, adhering closely to expectations. The increase in prices was fairly evenly disbursed throughout sectors, indicating no overwhelming sources of strain or pause. IPCA inflation now remains just below the upper end of the Central Bank of Brazil (BCB) 6.5% target and will likely drift rapidly lower into early 2009, as the fall in international commodity prices, an ease in economic activity, and lower ‘base effects’ hold sway. The base effect will likely be increasingly important into early 2009, as the surge in food prices earlier in the year works through the data easing year-on-year comparisons.