Itaú BBA - Global Growth Concerns Increase Markets Volatility

Latam FI Strategy Monthly

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Global Growth Concerns Increase Markets Volatility

January 28, 2016

Given the turmoil at the start of the year, LatAm FX depreciated earlier than expected.

For the full report, see enclosed file 


  • It has been an uneasy beginning of the year. The fixing of a more-depreciated yuan led to market turmoil, showing fears of a hard landing in China and global stagnation. Commodity prices dropped again, approaching the levels registered in the early 2000s. Stock markets and emerging-market currencies also fell.

  • The nervous market mood should be temporary. Economic data from China continue to indicate a gradual slowdown, while the fundamentals suggest some recovery in commodity prices going forward, particularly oil. However, recent market moves are a fresh reminder of the significant, ever-present, risks for the world economy.  

  • Given the turmoil at the start of the year, currencies in Latin America depreciated earlier than expected. Now, we expect currencies to remain relatively stable at these new levels in Mexico, Chile and Colombia, notwithstanding the rate hikes in the U.S.
  • In Latam, the impact of currency depreciation on inflation remains a concern, forcing most central banks in the region to continue their policy tightening. Brazil is an exception as the Copom decided to keep the Selic stable at 14.25% in its last meeting.

  • In FX, our financial fair-value models indicate that the CLP is currently fairly priced. The high-beta pairs under our coverage appear to be trading rich: the BRL is about 9.4% rich (1.8 standard deviations) and the COP is stronger than its fair-value as well by 3.2 standard deviations. In contrast, the MXN is about 5.6% weaker than the level predicted by macro fundamentals, with a gap of 1.9 standard deviations. In rates, we continue to see upside for yields on the back end of Mexican and Chilean curves, for we estimate that term premium-adjusted 5y5y forwards fall short of their theoretical steady-state level. We do not see opportunities in Colombian yields for now.


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