BCB may go for rate hike

The real continued with its winning streak yesterday as its appreciated 1.1% vs. the USD to USD-BRL 3.1323. Market expectations of COPOM (CB) remaining in tightening mode should continue to support Brazil's currency. 

The central bank of Brazil will announce this evening (local time) its O/N Selic rate decision. Commerzbank estimates a 50 bps rate hike to 13.75% (tonight) to then be followed by a final 25 bps rate hike as per the estimates in the next COPOM meeting (July 29) for a terminal rate of 14.0%. 

The local DI futures yield curve seems to agree with our estimates although there are some analysts that had expected (some still do) a mere 25 bps rate hike at today's meeting. In any case, the high carry embedded in the real should remain as an appreciation force in the absence of a negative global backdrop or a significant deviation from the ongoing fiscal austerity efforts.