Itaú BBA - The Low-Rates Environment Lingers
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Latam FI Strategy Monthly

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The Low-Rates Environment Lingers

July 15, 2016

The uncertainties over global growth triggered by the Brexit have pushed down DM and LatAm yields alike.

For the full report, see enclosed file


  • Latin American exchange rates have been more volatile since Brexit, but with no clear trend. Regardless of global evsents, regional growth has been disappointing, leading us to reduce our GDP growth forecasts this year for Mexico, Chile and Argentina. Next year, we expect a rebound, especially in Brazil.


  • The positive evolution of the exchange rate compared with last year, coupled with weaker growth, has reduced inflationary pressure throughout the LatAm region, allowing for a less conservative approach to monetary policy. BCCh is gradually moving away from monetary policy tightening. In Colombia, where the inflation outlook is more challenging, we expect another interest rate hike before the end of the cycle. We do not expect Banxico to hike again this year, unless the currency continues to depreciate.


  • LatAm currencies are trading broadly aligned (in a statistical sense) to the corresponding estimates of our models. The only exception is the MXN, which has drifted further away from the model’s estimate. The pair tested the 19/USD handle for the first time as Britain voted to leave the E.U.. We believe the MXN underperformance is not consistent with Mexico’s solid fundamentals.


  • The uncertainties over global growth triggered by the Brexit have pushed German, Japanese and U.S. yields to historical lows. Accordingly, long yields tightened all across LatAm. In Brazil, the curve became more inverted, additionally influenced by a widening of the front end after the 2Q Inflation Report. In Mexico, breakevens widened even more over June in contrast with our well-behaved inflation scenario.


  • In this month’s Box, we estimate the dynamic impact of market expectations’ shocks over Brazilian country risk.


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