Itaú BBA - Important political week in Brazil, CPI in Colombia

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Important political week in Brazil, CPI in Colombia

April 2, 2018

This week in Brazil, keep an eye on the political news flow and economic activity data

BRAZIL: Rates in the belly of the DI curve continued to decline a bit last week, causing further gains to our Jan 21 outright receiver (current P&L: +2.44%). The Jan 21 rate now stands at 7.96%, which still implies 298bps in rate hikes over the next 2 years and 369bps in hikes in 3 years. We still believe that the curve is too steep from the front-end to the belly and will maintain the receiver. Recent interviews by BCB governor Ilan Goldfajn continue to indicate that the government is inclined to set the inflation target at a level lower than 4.0% in 2021. This would likely cause additional tightening in nominal rates, but it is not expected for now, as the Monetary Council meeting to set inflation targets is only in June.

This week, keep an eye on the political news flow and economic activity data. The Supreme Court is expected to analyze former President Lula’s habeas corpus request on Wednesday. In addition, the deadline for those joining the Presidential race to leave executive positions and join parties is on Saturday (April 7th). On economic activity, we expect industrial production (Tue.) to grow 0.6% mom/sa, after a 2.4% drop in January which, in our view, was just a weak print amid a rising trend. Coincident indicators for March’s industrial production will also be released through the week.

COLOMBIA: The front-end of IBR rates declined last week, with the market pricing in around 20bps in rate cuts over the next 3 months, as inflation declines and economic activity remains weak. Labor market data for February, out last week, showed that urban jobs continue to be shed and the urban unemployment rate, which is a stronger driver of inflation than the national unemployment rate, continues to trend higher.

March’s CPI (Thu.) is the event of the week, for which we expect a 0.45% gain (bbg: +0.37%), keeping annual inflation broadly stable at 3.36%, close to the central bank’s 3% target. Any downside surprise will increase the odds of Banrep cutting the policy rate in its April meeting. The minutes of the latest policy rate decision (Fri.) will provide some indication as to how reluctant the board is to further easing.

We will maintain our receiver position on the 18-month IBR rate (current P&L: + 0.15%) as we believe declining inflation and slow activity will make Banrep engage in further easing.

MEXICO: TIIE rates continued to drop last week, together with MXN appreciation, and, as we expected, rates in the belly are declining faster than in the front-end. Last week, the 1y rate declined 5bps to 7.84% while the 3y rate dropped 9bps to 7.42%, making further gains to our position paid in the 1y and received in the 3y (current P&L: +0.19%). The spread between the two rates now stands at -0.42%, already close to our -0.50% target. We will maintain the position for now, but will switch to an outright receiver if/when the risk events (Presidential election and NAFTA renegotiation) pass without major turbulence on the MXN.

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