Itaú BBA - Minding FX and Spillovers

Latam FI Strategy Monthly

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Minding FX and Spillovers

August 14, 2015

However partly anticipated, upcoming rate normalization in U.S. may further strengthen the USD and pressure higher U.S. yields.

For the full report, see enclosed file 


  • Since our last report, Latam assets have underperformed both in FX and rates, amid a global backdrop of ever-strong USD and still-falling commodity prices.
  • In FX, Latam currencies depreciated about 6% in average, more than the average loss in EM FX (4%) – BRL and COP led the way (down). We calculate that the decline in commodities account for about half of the monthly depreciation in Latam FX. More than 30% of the weakness can be associated with widening CDS spreads (i.e., worsening expected fundamentals). About 20% of the move was due to the net effect of higher short-term U.S. rates.

  • In yields, Latam local curves showed a flattening pattern outside Brazil. Although this followed a global trend in recent weeks, the sell-off on the front end was much more intense than abroad, reflecting the impact of FX depreciation on monetary policy (communications and) expectations. In Brazil, a major bear-steepening trend took place after the downward revision of the fiscal targets (on July 22). Like other major Latam markets, FX correlation spiked in Brazil’s local yields.
  • However gradual and partly anticipated, the upcoming monetary policy normalization in the U.S. may further strengthen the USD and pressure higher U.S. yields. It is quite natural to expect further spillovers into Latam FX and rates markets. On currencies, we still favor relative trades in Latam (so as to explore asymmetries in macro fundamentals within the region, so as to reduce risks). On rates, we are renewing our call for payers, also taking advantage of market effects from higher FX pass-though concerns expressed by central banks in the region. 
  • As per our recommendations:

We recently went short BRL and long MXN. We entered this position with the BRLMXN cross at 4.709 and our target is 4.470 (stop at 4.790). The current value stands at 4.657 (as of August 13), resulting in a PNL gain of 107bps so far.  

We are adding TIIE payers in Mexico at the 5-year region. The entry is at 5.51%, and our target is 6.00% (stop: 5.20%).  

In Chile, we are setting payers at the 10-year region of Camara swaps:  entering at 4.60%, targeting 5.20% (stop: 4.30%).   

In Colombian IBR swaps, we are adding a (DV01-neutral) steepener. We recommend paying the 10-year and receiving the 1-year. Enter at 166bps (target: 250bps; stop: 125bps). 

Amid a spike in yield curve volatility, we recommend neutrality on Brazilian rates for now and are tactically waiting to re-load payers or steepeners. Despite possible “tactical” buying (especially after Moody’s announcement), we still see difficulties ahead, especially on the fiscal side. If a rally takes place, bringing yields close to levels seen on July 21st (the eve of the fiscal targets announcement), that would prompt us to pay long rates. 


Open Recommendations 

Closed Recommendations



Ilan Goldfajn - Chief Economist
Caio Megale
Mauricio Oreng,

Luiz Gustavo Cherman,
Eduardo Alonso,
Andre Merschmann,

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