Itaú BBA - Take profits in Brazil and Receive Mexico Outright – Local Rates Trade Idea

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Take profits in Brazil and Receive Mexico Outright – Local Rates Trade Idea

April 10, 2018

Will believe Mexican rates will normalize ahead as inflation declines.

We are taking profits on our receiver in Brazil’s DI Jan 21 rate, and switching Mexico’s position to an outright receiver on the 3y TIIE rate.

We are stepping out of Brazil’s DI Jan 21 receiver at 8.14%, down from 8.78% when we entered the trade back in January. The positioned earned a 2.0% gain. Although the curve remains very steep from the front-end to the belly, election uncertainty seems to be rising, especially because of the significant number of potential candidates in the center, as reported by local newspapers such as Valor Econômico. The recent price action, especially in the BRL, is concerning and may be a signal that markets will start to be driven more concretely by the electoral news flow. We will of course continue to monitor closely the election news and if there is more clarity going forward we could add the receiver again, as we believe rates in the belly are still attractive.

In Mexico, our position paid in the 1y and received in the 3y TIIE rates earned a 0.19% gain. We are eliminating the paid leg, thus maintaining an outright receiver in the 3y rate at 7.37%. The spread between the two rates dropped from -0.19% when we entered the trade back in February to -0.41% today.

The outright receiver in Mexico reflects our view that rates will normalize ahead, as disinflation gains traction (link here), NAFTA renegotiation seems to be heading for conclusion and it is becoming more likely that AMLO may win the election without a deterioration in the market. In addition, the significant decrease of inflation also reduces the probability of rate hikes in the short-term and increases the odds of an easing cycle starting later this year. Average annual inflation came in below Banxico’s forecasts and Governor Días de León has been stressing that deviations with respect to these quarterly forecasts will be important for rate decisions. We forecast that inflation will decline to 3.7% by year-end, below market expectations of 4.1%.

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