Itaú BBA - Weekly FI LatAm Strategy: Long-end real rates in Brazil to continue tightening

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Weekly FI LatAm Strategy: Long-end real rates in Brazil to continue tightening

February 4, 2019

We continue receive the NTN-B 2050 real rate in Brazil, as central banks in Brazil and Mexico are set to stay on hold this week.

All Latam: The combination of a dovish Fed and the possibility of a trade deal between China and U.S. continues to benefit EM currencies. We believe the EM currencies with high carry and GDP growth acceleration will benefit the most from this shifting global scenario.

While most of Latam local rates remained broadly stable last week, Brazilian interest rates tightened strongly throughout the entire curve. The DI Jan 20 (6.37%) is now trading slightly below the spot rate (6.40%), which indicates the market sees further rate cuts as a real possibility. Rate cuts are not in our base case, but we see the risk of further easing if the pension reform is approved and GDP growth remains weak. In this scenario, however, long-end rates would continue to tighten as the market would probably reduce estimates of Brazil’s neutral interest rate. For that reason, we continue to prefer the long-end, and remain receiving the NTN-B 2050 real rate (now at 4.42%) with a 38bps gain so far (see trade idea).

Chilean rates widened slightly at the front-end, while Colombia’s rates remained stable last week, benefiting our trade paid at the 1-year local rate in Chile and received at the 1-year local rate in Colombia (5bps gain) (see trade idea). Last week Chile’s central bank hiked the policy rate by 25bps while Colombia kept the policy rate stable, as expected. We see further upside for this trade as Chile’s interest rate appears more distant from neutral than in Colombia, while economic activity is recovering faster in Chile than in Colombia.

BRAZIL: The Lower House elected Rodrigo Maia (DEM) as the new President with 334 votes, while Davi Alcolumbre (DEM) secured his victory at the Senate with 42 votes. Rodrigo Maia’s speech defended the role of Congress in the country’s fiscal adjustment. And he has been a vocal supporter of the pension reform. According to local news (Veja) the pension reform will be presented to the Lower House until February 15th.

The Copom will meet on Wednesday. With inflation forecasts anchored around the respective targets up to 2021, in a context where the level of slack in the economy remains high, we believe that the Committee will keep the Selic rate stable at 6.5% p.a. In the statement, we believe the Copom's communication will signal a symmetrical balance of risks around inflation forecasts.

MEXICO: We expect Banxico to remain on hold at 8.25% (Thu.). The USD has depreciated against the peso given a more dovish message from the FED, putting less pressure on Banxico’s board to hike.



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