Itaú BBA - Bearish on the COP, amid mounting pressures in core yields

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Bearish on the COP, amid mounting pressures in core yields

October 13, 2017

The slow adjustment of Colombia’s current account deficit renders the COP the most vulnerable LatAm currency to a re-pricing of core yields.

STRATEGY TEAM:

Ciro Matuo, CNPI, ciro.matuo@itaubba.com
Eduardo Alonsoeduardo.marza@itaubba.com


For the full report, see enclosed file

Highligths

  • We estimate the recent correction in short US yields accounts for roughly two-thirds of the weakening of our LatAm FX index over the past month. Furthermore, our baseline is consistent with further upward correction in US rates and some additional USD appreciation. In this context, the slow adjustment of Colombia’s current account deficit renders the COP the most vulnerable LatAm currency to a re-pricing of core yields.
  • In Brazil, we see room for the Selic rate to go below 7.0% by the end of the easing cycle. To be precise, we expect cuts of 75bps in October, and two 50-bp cuts in the December and February meetings, taking the Selic to a final level of 6.5%.
  • In this context, we think there is still substantial premium built in the Jan-2019/Jan-2020 sector: the curve implies almost 150bps in hikes coming already in 2018, whereas we and the consensus anticipate no such rate raises next year.
  • In Mexico, our base case is that the policy rate will be kept at 7% at least until the beginning of 2H18 in light of the Nafta-related risks, the upcoming presidential elections and monetary policy in the US, in a context of solid growth and an interest rate within a range consistent with neutrality. In contrast, the TIIE swaps curve implies a more front-loaded easing cycle than our baseline.
  • The latest inflation release in Colombia surprised to the downside and reaffirmed the fading of supply shocks to food and tradable-goods prices. Yet, with annual inflation still close to 4%, Banrep will likely act cautiously and leave the policy rate unchanged at 5.25% for the remainder of the year. We acknowledge the risk that a faster disinflation process vis-à-vis our baseline could lead the central bank to frontload the monetary easing. Be that as it may, we are positioned to profit from the resumption of rate cuts via our 18-month receiver.


 


MACRO TEAM:

Mario Mesquita - Chief  Economist
Fernando M Gonçalves, fernando.goncalves@itaubba.com
Eduardo Alonso, eduardo.marza@itaubba.com



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