Itaú BBA - External tailwinds continue to back LatAm assets

Latam FI Strategy Monthly

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External tailwinds continue to back LatAm assets

May 13, 2016

LatAm FX is matched with our estimates; we see some mispricing in short Mexican yields and on Colombian breakevens

For the full report, see enclosed file

Highligths

  • The environment remains auspicious for emerging markets. The Fed has signaled it will not raise interest rates until it has greater confidence that global risks are subsiding. There is less pessimism over China’s performance, as the economy is now in a cyclical, investment-driven acceleration.

     

  • Commodity prices have recovered in a move apparently backed by fundamentals (except iron ore, the price of which may fall back). In this environment, we now expect stronger exchange rates than estimated in our previous macro scenario.

     

  • Economic activity has been stabilizing throughout the LatAm region, although it is still weak. With low growth and less pressure on exchange rates, the balance of risks for inflation improves. We expect no further rate hikes in Chile or Mexico, and we see rate cuts in Brazil during the second half of the year. Interest rates are only likely to continue rising in Colombia, where inflation shows no sign of improving. 

     

  • Overall, LatAm currencies are statistically matched to the corresponding estimates of our models. The only exception is the MXN, which has drifted further away from its estimate.

     

  • We sense there is some mispricing in the front end of Mexican curve, which is pricing in more than 50bps of rate hikes contrary to our scenario. In Chile the sector currently presenting the greater possibilities for positioning is the long end. The 5y5y forwards still fall short of the range for the terminal long-term rate (from 5.7% through 6.7%). Even after Banrep’s firmer response, implied inflation remains above the upper limit of the target. This is in contrast to our baseline scenario, and hence we believe there is some room for short and intermediate breakevens to narrow in Colombia.

 



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