Itaú BBA - A Broad-Based Rally in Latam Assets

Latam FI Strategy Monthly

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A Broad-Based Rally in Latam Assets

March 17, 2016

After a bumpy start of the year, local FX appreciated again; we analyze MXN returns from technical and econometric perspectives.

For the full report, see enclosed file 


• In the mature economies, we believe interest rates will remain low for longer. Even in the U.S., we now expect only two rate hikes per year (instead of three) in 2016 and 2017. This environment of lower risk and greater liquidity benefits Latin America. After a bumpy start of the year, local currencies appreciated again.

• In countries without visible improvement in the inflation outlook (e.g. Colombia), central banks will continue to increase interest rates. In Chile and Mexico, where inflation expectations are anchored and activity indicators have disappointed, we do not expect further rate hikes this year. In Brazil, monetary conditions are already restrictive and inflation is receding. We thus anticipate rate cuts in the second half of the year.

• Idiosyncratic factors helped LatAm currencies. In Brazil, markets started to price in higher chances of a shift in the current scenario. In other countries, currencies were affected by central banks’ reactions, especially in Mexico. In Colombia, the central bank continues to raise rates and is not signaling a near-term end to the tightening cycle.

• The current level of the COP and the CLP is in line with the results of our short-term models and the MXN edged closer to their estimate. In this month’s Box, we analyze the impacts of Banxico’s actions on the MXN from a technical and econometric perspective. The BRL appreciated even more since our last report, and is currently 13% stronger than suggested by our models.

• In rates, the highlight was the significant flattening of the Brazilian nominal curve, owing to idiosyncratic factors and lower inflation expectations. The Mexican curve flattened as well, in a re-pricing movement accompanying Banxico’s surprise hike. Colombian long rates are in line with their.



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