Itaú BBA - Paying Back to the Recent Rally

Latam FI Strategy Monthly

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Paying Back to the Recent Rally

October 8, 2015

Since we view the current “carry-appetite” in global markets as temporary, this recent rally created some opportunities.

For the full report, see enclosed file 

Highlights

  • Latam FX has been taking some respite from a bearish trend, favored by a (temporary) global risk-on sentiment stemming from market expectations of more distant Fed hikes. We estimate that the decline in short-dated U.S. Treasury yields was the key factor behind the recent gains in FX across the region.

  • Our models suggest that, except for the MXN, Latam currencies are headed for negative (carry-adjusted) returns by yearend, given our scenario of December Fed liftoff and our below-futures projections for selected commodities.   

  • Latam local rates have also been rallying lately, and especially on the long end, led by the (temporary) return of carry-trades. Given our expectations for monetary policy, we believe the front end is fairly priced in most markets (Brazil being an exception). But our scenario is consistent with renewed (upward) pressures on the belly and back end of Latam yield curves, as U.S. rates start moving higher and FX rates depreciate a bit further, in the near future.  
  • Since we view the current “carry-appetite” in global markets as a temporary development, this recent rally created some opportunities for FX (i.e., to trade asymmetries in external-sector fundamentals under tighter financial conditions) and for rates (i.e., adding payers and steepeners in local rates) in the region. As per our recommendations:  

In Brazilian rates, we recommend receiving the DI Jul-16 and paying the DI Jan-21, DV01 neutral: enter with steepness at 27bps, targeting 100bps and stop at -20bps. The rationale for this trade is based in our scenario of no rate hikes until 2016 and primary result of -0.7% of GDP next year (target: +0.7%).  

In Mexico, we keep our payer in 5-year TIIE swaps. Our entry was at 5.53% and the current price is 5.29%. The trade took further hit after the September U.S. payrolls. Our target is 6.00% (stop: 5.20%). We still see upside for long Mexican rates as the Fed heads for a liftoff in December.  

In Chile, we are once again paying rate, now at 7-year Camara swaps:  we enter at 4.40% and target 5.20% (stop at 4.00%). We believe the Chilean local curve boasts the largest upside (vis-à-vis fair value) for long rates in Latam markets.      

In FX, amid volatile global risk sentiment, owing to uncertainties about Fed policy and EM growth, we seek to explore diferences in currencies' sensitiveness to tighter global financial conditions. We are long MXN and short COP, having entered the trade with the cross (MXNCOP) around 174.5. We target 188.5 (8% upside). Stop at 167.5 (4% downside).  


 

Open Recommendations 

Closed Recommendations


 


MACRO TEAM:

Ilan Goldfajn - Chief Economist
Caio Megale
, caio.megale@itaubba.com
Mauricio Oreng, mauricio.oreng@itaubba.com

Luiz Gustavo Cherman, lcherman@itaubba.com
Eduardo Alonso, eduardo.marza@itaubba.com
Adriana Reali, adriana.reali@itaubba.com



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