Itaú BBA - Weekly FI LatAm Strategy: All eyes on cabinet names in Brazil; taking profits on our receiver in CO

Latam FI Strategy Monthly

< Back

Weekly FI LatAm Strategy: All eyes on cabinet names in Brazil; taking profits on our receiver in CO

November 5, 2018

Our DI Jan 21 receiver currently posts a 100bps gain, and we are keeping it for now.

All LatAm: The U.S. mid-term election (Nov. 6) takes center-stage this week. A split Congress - with democrats retaining majority in the House and Republicans in the Senate - seems the most likely result, but not a done deal. This would signal tighter fiscal policy in 2020, which would likely be USD negative and EM positive.

The FOMC meeting will be held on Thursday. Friday’s solid Payroll with wages surpassing 3% reinforces the case for the FOMC to keep “further gradual increases in the target range”, despite the recent equities sell-off.

BRAZIL: The rally in local rates continued for yet another week, with rates in the belly and the long-end declining between 10 and 20bps. Brazilian markets are yet to bear the impact from the stronger-than-expected U.S. payroll report, because Friday was a local holiday and markets were closed.

Our DI Jan 21 receiver currently posts a 100bps gain, and we are keeping it for now. With a wide output gap and a more appreciated BRL, we believe Copom will keep rates stable for a long time.

This week keep an eye on possible announcements of the new economic team, and the Copom minutes (Tue.). According to Valor Econômico, some important names of the new economic team are expected to be announced this week. This includes whether or not Ilan Goldfajn will remain governor of the Central Bank. In the minutes, the Copom is likely to keep the indication of stable rates going forward, in our view.

COLOMBIA: Local rates widened somewhat last week. Rates from the belly to the long-end widened between 10 and 15 bps.

We are stepping out of our 12m IBR receiver today with a 13bps gain. The main reason is the possible VAT tax reform, which could have a significant impact on inflation to the upside going forward.

MEXICO: Local rates continued to widen significantly last week, on concerns about policy of the incoming administration. Rates in the belly of the curve widened by around 20bps while the long-end deteriorated around 40bps (see chart). We have no position in Mexico today, but see rates at attractive levels. As inflation declines, some improvement in the signals about AMLO’s policies would be an opportunity to receive.



< Back