BNY’s Geoff Yu notes Brazilian portfolio inflows are near post-COVID highs ahead of the Selic decision, with strong demand for equities and government bonds. He highlights that FX conviction is limited as volumes are low and currency positioning neutral, while iFlow data suggest the broader inflow cycle peaked in April and the financial account is likely to stabilize rather than re-accelerate.
Flows strong but FX conviction cautious
“BRL flows are recovering ahead of today’s Selic rate decision, supported by renewed terms of trade interest, strong equity demand and continued purchases of Brazilian government bonds. Conviction remains limited, however, because FX volumes are exceptionally low, currency holdings are effectively neutral and the broader portfolio flow cycle appears to have peaked. The recent sharp spot outflow looks more transaction-driven than evidence of a wider reversal, particularly given the otherwise constructive asset flow backdrop.”
“Despite our caution on the currency itself, the clearest validation of a stronger market view on Brazil is the continued improvement in underlying asset flows. Equities and sovereign bonds have recorded very few outflow sessions over the past month, with equity demand particularly firm. Government bond inflows should remain the main anchor for Brazil’s external liability position.”
“Although flow magnitudes have been softer for bonds than for equities, momentum remains positive and points to continued carry demand. The main challenge is duration. The current Fed backdrop and steeper U.S. Treasury curve are more supportive of front-end exposure, while emerging markets benefit most when hawkish monetary policy and fiscal credibility reduce term premiums and improve access to longer-term funding.”
“Brazil’s financial account nevertheless remains strong, although momentum is slowing. Our iFlow EM portfolio flow proxy continues to track the official balance-of-payments data closely and suggests combined inflows peaked in April, which is consistent with the official figures. The pace of deterioration eased in July, but the broader direction remains clear.”
“Following a decline of roughly $1bn in June, the monthly net financial account balance is likely to stabilize around zero rather than return quickly to the exceptional inflow levels seen earlier in the year.”
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)
