Itaú BBA - Cautiously Positioned Ahead of Liftoff

Latam FI Strategy Monthly

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Cautiously Positioned Ahead of Liftoff

November 16, 2015

We maintain a conservative approach as the market isn’t convinced about the speed of the U.S. rate normalization process ahead

For the full report, see enclosed file 

Highlights

  • Since our last report, Latam FX has held up relatively well, despite the rise in short-dated U.S. rates and the decline in commodity prices. That resilience was probably favored by the FX interventions and a lighter technical position. As an upshot, most pairs moved closer to our fair-value estimates – particularly the case for the BRL – yet the MXN still shows some “cheapness”.

  • In local rates, a sell-off took place all across the region. In Brazil, lingering fiscal concerns and increased inflationary fears continue to support a fat premium in nominal yields and hefty breakeven inflation rates. In Colombia, the front end saw a re-pricing after Banrep’s steeper-than-expected rate hike. In Mexico and Chile, the widening in yields was driven by the spike in U.S. Treasury yields, amid increased probability for a Fed liftoff in December.    

  • Assuming our baseline macro scenario of rising U.S. rates and stable commodity prices, our FX models point to negative (carry-adjusted) returns for the BRL, and moderate losses (or even mild gains) for other Latam currencies. But we refrain from taking position on the realm of currencies for now, as the USD has largely anticipated the new scenario, and since we expect most of the effects of Fed hikes to show on the Latam yields space.
  • We continue to see the front end of Latam local yields either well priced, or correctly reflecting risks for monetary policy. In Brazil, the uncertainties will continue to support the high premia. In Mexico and Chile, we continue to see upside for longer-dated yields, on the back of rising U.S. Treasury rates.
  • As per our recommendations, we maintain a conservative approach, as the market seems not entirely convinced about the timing and speed of the U.S. rate normalization process ahead, a key element in our trading views:

In Mexico, we are adding a 1y10y steepener in TIIE swaps. We enter around 250bps, targeting 320bps (stop: 210bps).  

In Chile, we keep our payer on 7-year Camara swaps: we entered at 4.37% and the yield is now 4.57%, prompting a PNL gain of 122bps so far;  

Although we see downside for BRL returns and upside for MXN returns, we are tactically flat on FX;   

We like steepeners in Brazil, but the time is not ripe for such a trade, amid fears about regulated price hikes next year and market conjectures about the chances of passing fiscal adjustment measures not accounted for in our baseline call.  


 

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
Adriana Reali, adriana.reali@itaubba.com

 



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