Itaú BBA - Weekly FI LatAm Strategy: NAFTA deal, MX rates started to tighten last week, Banxico to stay on hold

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Weekly FI LatAm Strategy: NAFTA deal, MX rates started to tighten last week, Banxico to stay on hold

October 1, 2018

We continue to receive local rates in Mexico and Colombia.

MEXICO: Local rates tightened considerably last week (see chart), benefitting our 5Y TIIE FX-hedged receiver (now with a 20bps loss, from -36bps one week ago). The tightening started after the lower-than-expected bi-weekly CPI on Monday and continued throughout the week. Despite the more favorable environment for EMs in general last week, rates didn’t tighten as much in other Latam countries (see charts).

During the weekend, Canada reached an agreement with Mexico and the U.S. to revamp NAFTA. The leaders of the three countries will sign the deal by the end of November, before Enrique Peña Nieto steps down from Mexico’s presidency. Approval in the U.S. congress is likely next year. The agreement reduces an important source of uncertainty for Mexico’s economy.

We expect Banxico (Thu.) to keep the policy rate stable at 7.75%. The board sees the current inflationary pressures as transitory and there was a moderation in some of the risks closely monitored by the central bank, especially related to NAFTA.

We keep our FX-hedged 5Y TIIE receiver. Mexican real interest rates are at historically high levels, and the yield curve is flat, pointing to no normalization in rates in the near future, which we believe is excessive.

BRAZIL: Weekend voting intention polls indicate a run-off between Jair Bolsonaro (PSL) and Fernando Haddad (PT), and the latter with a slight lead in second-round simulations. Several polls are expected to be released this week, starting with an Ibope poll tonight.

We have no position in Brazilian rates today, given the local uncertainties. The yield curve prices in a substantial tightening cycle after the election.

COLOMBIA: Local rates have been significantly stable (see chart), and we continue to receive at the very front-end. The yield curve prices in 86bps in hikes in one year, which we believe is excessive given the still-wide output gap and inflation close to the 3% target. Our 1-year IBR receiver currently earns a 20bps gain.

 



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