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In today's newsletter, we explore the global financial landscape, with a focus on key developments. Traders are gearing up for a potential rise in the Indian rupee, which showed significant strength against the US dollar on Friday. Meanwhile, Chile's rejection of a second proposal for a new constitution within a span of two years underscores the challenges in the country's political system to address social demands through the creation of new fundamental laws. Shifting our attention to Brazil, the central bank made a significant move by implementing an expected 50-basis-point reduction in the policy rate.

– Matheus Zani & Daniel Porto

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2. Chile rejects second constitutional proposal

Chile has rejected a second proposal for a new constitution within two years, underscoring the inability of the nation's political system to address social demands through the formulation of new foundational laws. The primary right-wing party in the country, which had actively participated in drafting the recent proposal, acknowledged its defeat on Sunday as 54% of the votes were tallied—55% of which were against the proposed text, while 45% were in favor. This outcome, consistent with recent polls, means that the existing constitution, dating back to the Augusto Pinochet dictatorship, will persist.

In other developments, the Central bank has published a survey of traders and investors on its website, revealing key insights into market expectations:

• The key rate is anticipated to reach 7.25% in the next two meetings and 6.50% in the subsequent four meetings.

• In 12 months, the key rate is projected to be at 5.00%, and in 24 months, it is expected to further decrease to 4.50%.

• The Consumer Price Index (CPI) is foreseen at 2.90% year-on-year in the next 12 months and at 3.00% year-on-year in the following 24 months.

• The exchange rate is expected to be 880 Chilean Pesos per US Dollar in the coming 7 days, with a further decrease to 870 CLP/USD in the subsequent 28 days.

3. BCB - bit more dovish than previous communications

In its latest move, Brazil's central bank implemented a widely anticipated 50-basis-point rate reduction and adopted a slightly more dovish stance in the post-meeting statement. Following the policy rate cut to 11.75%, the bank's statement exhibited a greater dovish tone compared to previous communications, contributing to a subsequent downward shift in the yield curve.

The forthcoming meeting minutes present an opportunity for the central bank to fine-tune the message tone if policymakers deem the recent shift as overly pronounced. This adjustment could involve expanding the discussion on recent labor market data and addressing uncertainties regarding the level of economic slack. Additionally, domestic fiscal performance, the outlook for the BCB board composition from 2025, and the actions of the Federal Reserve will also be in the spotlight.

Anticipating a continued easing, the market expects the central bank to bring the policy rate down to 9% by the conclusion of 2024. Despite this, the ex-ante real rate, discounted by inflation expected in the next 12 months, has dropped to 7.5%, significantly surpassing the central bank's neutral rate estimate of 4.5%. Consequently, monetary policy remains notably tight. The unanchored long-term inflation expectations pose the primary obstacle for the central bank to expedite rate cuts.

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