Itaú BBA - Pay 1y local rate in Chile and receive 1y rate in Colombia – Local Rates Trade Idea

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Pay 1y local rate in Chile and receive 1y rate in Colombia – Local Rates Trade Idea

January 29, 2019

We forecast 100bps in hikes in Chile and 50bps in Colombia this year.

We recommend paying the 1-year local rate in Chile, and receiving the 1-year local rate in Colombia. Colombia’s 1-year rate currently stands at 4.45%, while Chile’s sits at 3.17%. The spread between the two rates is currently at 1.28%, and we believe it could fall to a level in between 1.0% and 1.1%.

The market is pricing in around 50/60bps in rate hikes this year for both countries, while we forecast 100bps in hikes in Chile and 50bps in Colombia. We note Chile has already started a hiking cycle in October and monetary authorities are indicating they plan to gradually bring the policy rate to a neutral level (4.0-4.5%) during the first half of 2020. In our view, Chile’s current policy rate (2.75%) is at a more stimulative level than Colombia’s (4.25%). The output gap in Colombia appears to be wider than in Chile, and recent data indicate that economic activity is improving faster in Chile than in Colombia.

We expect the Chilean central bank to hike the policy rate by 25bps to 3.0% in its meeting tomorrow. While most of this hike is already priced in (19bps), the move will help consolidate our view that the central bank will continue its gradual hiking cycle this year.

The main risk to this trade is Colombia’s vulnerable fiscal and current account position, which could cause the currency to depreciate more than in Chile in case of a global sell-off, with more adverse consequences to inflation than in the case of Chile. This is the main reason why we are receiving the very front-end of the curve, instead of increasing duration.



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