Itaú BBA - Weekly FI LatAm Strategy: Copom to keep Selic rate stable at 6.50%, all eyes on electoral

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Weekly FI LatAm Strategy: Copom to keep Selic rate stable at 6.50%, all eyes on electoral

September 17, 2018

Prices in the front-end of the yield curve imply a 14bps hike in this meeting, and substantial monetary policy tightening after the elections

BRAZIL: We expect the Copom (Wed.) to alert for the deteriorating balance of risks, but keep the policy rate stable at 6.50% in its last meeting before the Presidential elections in October. Prices in the front-end of the yield curve imply a 14bps hike in this meeting, and substantial monetary policy tightening after the elections.

Recent voting intention polls show Jair Bolsonaro (PSL) leading the race and a significant increase in Fernando Haddad’s (PT) voting intentions. Three polls will come through this week: CNT/MDA (today), Ibope (from tomorrow onwards) and Datafolha (from Thursday onwards).

We have no position in Brazilian local rates today, but we acknowledge that a continuity of the reform agenda post-election would cause rates throughout the curve to tighten substantially.

MEXICO: Local rates tightened somewhat last week (see chart), benefiting our FX-hedged 5y TIIE receiver (now with a 31bps loss, from -35bps one week ago). We continue to believe rates are too high given current FX levels, and see the recent pickup in inflation as temporary.

COLOMBIA: Colombian local rates also tightened last week (see chart), benefiting our outright receiver in the 1-year IBR (now with a 15bps gain, from 10bps one week ago). The market still prices in 84bps in hikes in one year, which we believe is excessive given the wide output gap and inflation nearing the 3.0% target.

 

 



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