Itaú BBA - Weekly FI LatAm Strategy: Confirmation hearing of new BCB governor to take place on Tuesday

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Weekly FI LatAm Strategy: Confirmation hearing of new BCB governor to take place on Tuesday

February 25, 2019

We have no position in Brazil’s rates today, amid uncertainties towards the pension reform discussion

ALL LATAM: Progress on the U.S. and China trade negotiations provide a positive environment for emerging markets at the start of the week. Trump said that given “substantial progress” on issues including intellectual property and technology transfer, he will delay U.S. tariff increases scheduled for March 1. In addition Trump explained that “assuming both sides make additional progress, we will be planning a Summit for President Xi and myself at Mar-a-Lago to conclude an agreement”.

CHILE, COLOMBIA: We continue to pay the 1-year local rate in Chile and receive the 1-year local rate in Colombia (see trade idea). Rates at the very front-end widened slightly in Chile and remained stable in Colombia last week, further benefitting our recommendation (now with a 10bps gain). Market prices sill imply around 58bps in hikes in Colombia until year-end and 26bps in Chile. We continue to believe that the spread between Colombian and Chilean 1-year rates will continue declining.

BRAZIL: We have no position in local rates today, amid uncertainties towards the pension reform discussion and because we expect no rate cuts in the short term. Rates widened around 7bps at the belly and 15bps at the long-end last week.

The government sent the ambitious pension reform to Congress, as expected, but the approval process will be long and risky. Lower House Speaker Rodrigo Maia, in an interview to Valor Econômico out this morning, sounded cautious on the government’s political articulation and timing for the reform’s process in the Lower House. Maia will try to set the Constitutional and Justice Committee (CCJ) on Tuesday this week. This will be closely monitored by the market, because the pension reform is likely to be analyzed by this commission next month.

The confirmation hearing of incoming BCB governor Roberto Campos Neto in the Senate, as well as directors Bruno Serra and João Manoel Pinho de Mello, is scheduled for Tuesday. The hearing will be an important driver for the front-end and belly of the curve, as the market has been discussing the possibility of further rate cuts. We believe the policy indications in the hearing will likely be consistent with recent official communication by the Copom, and do not expect clear indications of rate cuts for the time being.

 



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