Itaú BBA - Flat on Currencies for Now

Latam FI Strategy Monthly

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Flat on Currencies for Now

December 11, 2015

Our fair-value models were pointing to short-term “richness” in most Latam currencies


Ciro Matuo, CNPI,
Eduardo Alonso,
Adriana Reali,

For the full report, see enclosed file 


  • Over a month’s time (up to December 07), our Latam FX index weakened by 2%. According to our calculations (based on elasticity estimates from our FX models), the downside pressure largely stemmed from the sharp decline in commodity prices (especially oil and metals), with only a mild contribution from higher shorter-dated U.S. Treasury yields.  

  • Judging exclusively from the short-term FX fundamentals (i.e., commodities, interest-rate differential, CDS spreads), the depreciation in Latam FX could have been yet more intense, if it wasn’t for other factors (out of our models) such as central bank interventions, highly sold positions, carry-appetite.     

  • As an upshot, our fair-value models were pointing to short-term “richness” in most Latam currencies under our coverage. In terms of positioning, the opportunities flagged by our fair-value models are offset by qualitative risk factors:

BRL: as the currency depreciated less than short-term fundamentals would tell, the BRL has turned 10% stronger than our fair-value estimate (as of Dec 07). Our simulations indicate (carry-adjusted) losses ahead, in a scenario of Fed hikes and Chinese risks. The political news flow continues to generate volatility and double-edged risks, however. Carry gains seem to attract foreign investors and technical positions seem neutral. We see an unfavorable risk-reward to set positions in either direction, so that we prefer to remain on the sidelines for now. We would potentially buy USDBRL below 3.70. 

MXN: despite recent pressures from lower oil costs, the MXN was a bit rich (as of Dec 07), yet not too far from the fair value. Our simulations point to near-zero returns ahead. Risk-wise, Banxico interventions might prop up the currency, but oil, Fed hikes and a likely delay in Mexican liftoff, could add downside risks. Technicals look neutral. We stay flat. 

CLP: our models show CLP was still rich (as of Dec07), as the currency weakened less than the copper decline would tell. The models project negative returns, but we refrain from selling at current levels, given an oversold technical position. We would buy USDCLP at 695.  

COP: by and far, the underperformer among major currencies amid an oil slump and a high-bar to trigger Banrep interventions. Reduced liquidity added to a poor price action, taking the COP to cheap levels relative to our fair-value estimate. We believe the downside risks for oil and Colombia’s external vulnerabilities amid Fed hikes and lower liquidity do justify not going long. 

Thus, we remain on the sidelines on the Latam FX space, amid a conjunction of uncertainties. Still, as in our previous reports, we believe the risks remain biased towards more negative returns in coming months.



Ilan Goldfajn - Chief Economist
Caio Megale
Mauricio Oreng,

Luiz Gustavo Cherman,
Eduardo Alonso,
Adriana Reali,

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