Itaú BBA - Weekly FI LatAm Strategy: Bolsonaro wins election in Brazil, Copom to keep rates stable this week

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Weekly FI LatAm Strategy: Bolsonaro wins election in Brazil, Copom to keep rates stable this week

October 29, 2018

We continue to receive local rates in Brazil.

BRAZIL: The rally in local rates continued last week, and the belly outperformed the rest of the curve. The decline in U.S. rates, lower than expected inflation in Brazil, and lower uncertainty on the political side helped rates to continue tightening. A survey made by Estadão newspaper showed 215 members of the elected Lower House in favor of the pension reform, 56 against and 242 did not reply or are undecided. These numbers are significantly better than the surveys made with the current congress since early 2017, in which the number of Lower House members in favor of the reform never reached 100.

The election on Sunday was in line with expected, with Jair Bolsonaro (PSL) winning with 55% of the valid vote, against 45% of Fernando Haddad (PT). In his victory speech, Bolsonaro defended fiscal adjustment and less bureaucracy. The races for state governments were also important, with the main highlight being Joao Doria’s (PSDB) win in São Paulo, and Romeu Zema’s (NOVO) victory in Minas Gerais.

Our DI Jan 21 receiver currently posts a 83bps gain, and we are keeping it. With a wide output gap and a more appreciated BRL, we believe the Copom keep rates stable for a long time, while the yield curve still prices in more than 200bps in hikes from here until the end of 2019.

We expect Copom (Wed.) to keep rates stable at 6.5%, reduce its inflation forecasts, and qualify its assessment that the risks to inflation would be asymmetric. The appreciation of Brazilian assets since the last Copom meeting suggests less asymmetry in the upward direction. The communication will likely be consistent with stable rates going forward, which could trigger some further tightening in rates.

MEXICO: Rates continued to widen last week, despite the lower than expected inflation print. Concerns about the new government’s policies are affecting the market. In a four-day nationwide “consultation” ending on Sunday, Mexicans decided that they want the new government to scrap the project to build a new international airport in the country’s capital city.

Our 5-year TIIE receiver (FX hedged) currently bears a 45bps loss. We are keeping it because of the ongoing slowdown in inflation, which in theory reduces the pressure on Banxico to hike rates before yearend. However, the results of the consultation, and the ongoing depreciation of the Mexican peso could trigger a rate hike in the next meeting. The market prices in around 25bps in hikes in the next 3 months (2 Banxico meetings).

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