Itaú BBA - Adding Payers, Gradually

Latam FI Strategy Monthly

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Adding Payers, Gradually

May 12, 2015

In Latam rates, the front-end shows the monetary policy outlook fairly priced, whereas for the back-end we see upward pressures ahead

For the full report, see enclosed file 

Highlights

  • The partial recovery in commodity prices from recent lows led to an appreciation in most Latam currencies over a month’s time, with the COP outperforming. At the same time, the sell-off in long DM yields caused steepening pressures in most Latam markets, especially in Mexico. Amid persistent short-term uncertainties about U.S. rates and commodities, global market volatility should continue to spill over into Latam assets in coming weeks (and months).   
  • Our FX fair-value models indicate that the COP appreciation and the MXN weakness may have been exaggerated, with the former showing a rich valuation, and the latter presenting more limited downside risk for the short term. Considering our currency estimates and baseline scenario (including higher U.S. rates, stronger USD, stable commodities), we see value being short COP and long MXN. We enter the MXNCOP cross at 156.2, with target at 163.4 (a 4.6% upside) and stop at 151.7 (a 2.9% downside). This position profits from the higher sensitiveness of the COP to higher global rates, given Colombia’s higher current account deficit (as compared to Mexico’s). But another round of oil price gains could bear on this trade, as the Colombian economy is more exposed to oil. The unexpected realization of dovish macro scenarios (affecting both Fed’s and Banxico’s policy signals and decisions) could also weigh on this position.

  • As per the BRL, our estimates imply zero carry-adjusted returns for the next couple of months. We remain on the sidelines for now.

  • In Latam rates, the front-end shows the monetary policy outlook fairly priced in most markets under our coverage. For the back-end, we look for upward pressures ahead, given our views on U.S. rates. We recommend a gradual positioning, though, given the still-choppy market conditions. In summary:

In Brazil, bond valuations are clouded by the implementation of macro adjustments on one side, and remaining execution risks on the other. But the yield curve slope is increasingly inverted, as the market prices in more rate hikes in the short run, and chances of convergence in the long run. 

The tougher tone of recent Copom communications has pressure short yields higher, and the market now prices in Selic tightening up to 14.00%. Although we see a bit of premium (as we project Selic peaking at 13.50%), the timing is no good for receivers in the front end. 

The recent rally in long Brazilian rates (especially in the far back-end of linkers) removed the attractiveness for receivers in our view. For the downside of long Brazilian rates to be extended further, it may take a convergence of Brazilian CDS to the average of sovereigns rated BBB- (i.e., investment grade as the market’s baseline scenario), and a belief that the IPCA will settle at 4.5% for many years out, bringing down the inflation BEs. It may take a while before the market adopts these conjectures.

In Mexico, the front end seems to price in rate hikes of 150bps (to 4.50%) until 2016, in line with our scenario. We see room for steeper yields, as (expectations about) the Fed’s liftoff pressures global rates, even in the back end. Mexican rates are largely correlated with U.S. yields in longer tenors, so we maintain our payer at the 10-year sector of TIIE swaps.

In Colombia, the market still prices in about 80% chances for a 25-bp policy rate cut. While this is not our baseline, we see limited value in setting a (payer) position. We maintain our payer at the 5-year sector, since we believe higher U.S. yields will put pressure on Colombian IBR swaps. 

In Chile, the front end of Camara swaps price in rate hikes nearly in line with consensus (up to 75bps), against our call for rate stability. We sense that upside inflation surprises may prompt a move by the BCCh, so we prefer not to confront the current pricing and stay neutral, given the asymmetrical risks for monetary policy.


 

Open Recommendations 

Closed Recommendations


MACRO TEAM:

Ilan Goldfajn - Chief Economist
Caio Megale
, caio.megale@itaubba.com
Mauricio Oreng, mauricio.oreng@itaubba.com

Luiz Gustavo Cherman, lcherman@itaubba.com
Eduardo Alonso, eduardo.marza@itaubba.com
Marcela Rozo, marcela.rozo@itaubba.com



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