Itaú BBA - Tactically out of receiving position in Mexico, waiting for a NAFTA deal – Local Rates Trade Idea

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Tactically out of receiving position in Mexico, waiting for a NAFTA deal – Local Rates Trade Idea

May 14, 2018

We will step out tactically, but continue to monitor the trade, and receive again if a NAFTA deal is announced

Local rates are moving slightly up again today, after substantial widening in recent weeks, because of (1) the tightening in global financial conditions, (2) AMLO becoming more likely to win presidency, (3) fears that his party will be able to increase representativeness in Congress, and (4) the lack of a NAFTA agreement up to now.

The market now implies above 20bps in hikes over the next 3 months, and a spot nominal rate close to 7.2% in the next 3 years. These levels seem excessive, especially taking into account the fast decline in inflation, which is already below 2.5% in the last three months, seasonally-adjusted and annualized.

However, a lack of a NAFTA deal could cause prices to deteriorate further. Although a NAFTA deal is our baseline, risks remain high. No deal this month would increase the odds of no NAFTA 2.0 deal at all, especially because Mexico’s Presidential election is approaching (July 1st).

We are tactically stepping out of our receiver on the 3y TIIE rate (1.16% loss), but will get back to it if (and as soon as) a deal is announced. We see risks of no NAFTA deal, but we also think that if it is reached local rates could tighten substantially, given the fast inflation decline. So we will step out tactically and will continue to monitor the trade. 



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