Itaú BBA - Stay received in the belly of Brazil and front-end of Colombia local rates

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Stay received in the belly of Brazil and front-end of Colombia local rates

March 12, 2018

Stay received in the belly of Brazil and front-end of Colombia local rates


Ciro Matuo, CNPI,

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Brazil: The front-end and belly of local DI rates continued to tighten last week, as BCB governor Ilan Goldfajn mentioned that latest inflation prints have surprised to the downside, industrial production came out weaker than market expectations, and February’s IPCA release confirmed that the core inflation trend continues to be very well-behaved. The market now prices in around 80% chance of another 25bps cut in the COPOM March meeting and already a small chance of a final 25bps cut in the May meeting. After that, the curve remains very steep, with market pricing in 322bps in hikes over the next 2 years and 388bps in hikes in the next 3 years. Our receiver position in DI Jan21 is enjoying a 1.60% gain and we will keep it because we still believe the curve is too steep.

This week will be relatively data poor, with the key release being January’s retail sales on Tuesday. We expect a 0.4% gain in the core index and a 0.1% drop in the broad index. Weekend news flow was again focused on the preliminary political moves for the 2018 Presidential race.

Colombia: The front-end of the IBR curve tightened considerably last week after February’s CPI inflation came out lower than expected at 0.71% (mkt: 0.75%) taking the twelve-month reading to 3.37%, a level that is already close to the one we believe Banrep would engage in additional rate cuts. The market now prices in 20bps in cuts over the next 3 months and 30bps in cuts over the next 6 months. We expect two further 25-bps rate cuts in the coming months, taking the policy rate to 4.0%. Our receiver position in 18-month IBR rates went well last week, now with a 0.09% gain. We will keep it as we see room for further tightening.

On Sunday, Colombia voted for the 268 members of Congress to be appointed and, as, expected, both chambers continue to be dominated by stablished center-right parties. This week’s highlight will be January activity indicators to be released on Wednesday. We expect industrial production to increase a mild 1.6% yoy, and retail sales to grow 1.5% yoy, with car sales still a drag.

Mexico: As the Mexican peso remains well-behaved and inflation continues to drop, local yields have been tightening and, as we expected, the belly of the curve is tightening more rapidly than the front-end, favoring our recommendation to pay the 1y rate and receive the 3y rate. The spread between the 2 rates was -0.20% when we entered the trade, now it is at -0.35% and we target -0.50%. The trade currently posts a positive return of 0.13%. We will keep it and will switch to an outright receiver position if/when the risk events (Presidential election and NAFTA renegotiation) pass without major turbulence on the MXN.

This week’s highlights will be January’s industrial production on Tuesday. We forecast 0.5% year-over-year growth (from a 0.7% contraction in December) driven by stronger manufacturing exports (in response to the pick-up of the US economy) and a smaller contraction of oil output.

Argentina: On Tuesday, the central bank will hold its biweekly monetary policy meeting to decide on the reference rate. The central bank left its benchmark interest rate (7-day repo rate) unchanged at 27.25%, in both meetings held in February. In the latest statement, the central bank said that it will act with extreme caution and will wait for disinflation signals before easing the monetary policy rate further. We do not expect changes in the next meeting, as inflation expectations are rising and inflation readings are unfavorable.


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