Itaú BBA - Favorable Global Environment, Even If Volatile

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Favorable Global Environment, Even If Volatile

June 17, 2016

The BRL is trading near our model’s estimate, but our numbers indicate that the MXN is oversold.

For the full report, see enclosed file

Highligths

  • The global scenario is once again favorable to emerging markets. The U.S. economy continues to recover, but weaker labor market data suggest that the Fed will be in no rush to raise interest rates. In China, growth has been stabilizing, and economic volatility is likely to ease. In this environment, commodity prices have risen and funds are flowing back to emerging markets.

     

  • However, risks persist. In the short term, the most obvious is the UK referendum on June 23. The most likely scenario is that the UK will remain in the European Union, but the chances of its leaving are not insignificant. The U.S. presidential election poses another risk to the global economy, but it is likely to be some months before it becomes a determining factor for asset prices.

     

  • The BRL is trading near our model’s estimate. Given the medium-term projections of our baseline macro scenario and the possibility of BCB intervention (either by offering reverse FX swaps or by refraining from rolling over the outstanding contracts) we keep a slight bearish view on the BRL. Our numbers indicate that the MXN is oversold: the currency is trading roughly 14.5% weaker than our projection.

     

  • Our analysis suggests there is some premium built in the Colombian curve past the 3-year, given that the forward-implied trajectory for the target rate is not consistent with our macro scenario. Chilean rates’ current pricing is the most aligned with valuation tools’ estimates. The only sector with some upside potential would be the back end, as 5y5y forwards are strolling below the lower bound of our theoretical terminal rate calculation. In Mexico, 2-year breakevens have somewhat “overshot” the center of the inflation target, possibly due to higher pass-through expectations following the MXN sell-off. However, we see longer-dated breakevens as “fairly priced”.

     

  • In this month’s Box, we continue the research program started in April and analyze the out-of-sample forecast performance of different econometric models for Brazilian nominal rates.
     

 



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