Itaú BBA - Relief for EM Assets Amid Global Stimulus

Latam FI Strategy Monthly

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Relief for EM Assets Amid Global Stimulus

April 11, 2016

We investigate how shocks to expectations affect the Brazilian curve, which inverted in March - edging closer to our scenario.

For the full report, see enclosed file


  • Monetary policy in mature economies is once again supporting the global economy. The Fed has signaled a more cautious approach to interest rate hikes this year, and the ECB has announced further measures to expand credit. As a response to the risk of a slowdown, the Chinese government has also moved towards looser (monetary and fiscal) economic policies.

  • This environment has driven an improvement in global financial conditions and commodity prices, benefitting Latin America. Compared to our previous scenario, we now expect stronger exchange rates across the continent’s major countries

  • Low growth and less pressure on the exchange-rate market have made room for a looser monetary-policy stance. We are not forecasting interest rate hikes in Chile and Mexico for this year, and we expect Brazil to start cutting rates from July. The sole exception is Colombia, where the outlook for inflation remains challenging, so we expect additional rate hikes.

  • The recent rally has pushed the COP away from our estimate (about 7.6% stronger). Notwithstanding the gains in oil prices and the better financial conditions overseas, we believe the COP is overbought. There was some correction of the MXN across March, but is still 2.7% weaker than our estimate. We therefore believe there is no longer a case for long positions on the currency. The BRL is overpriced by 5.1% and the CLP by 2.2%.

  • The Brazilian benchmark nominal curve inverted again in March, as the market has brought forward the expected loosening cycle. Until the recent downward IPCA surprises, part of the market believed that inflation would remain elevated because of the fiscal problems and due to inertia. Our models have indicated that the combination of a recession with a more stable exchange rate would be enough for a downward inflation trend.

  • In this month’s Box, we investigate how shocks to expectations affect the Brazilian nominal yield curve


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