Itaú BBA - Weekly FI LatAm Strategy: Receive local rates in Brazil, as election uncertainty declines

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Weekly FI LatAm Strategy: Receive local rates in Brazil, as election uncertainty declines

October 8, 2018

We recommend receiving DI Jan 21 outright.

BRAZIL: Jair Bolsonaro (PSL) received 46% of the valid votes, surprising to the upside (polls on Saturday indicated 40/41%). Fernando Haddad reached 29% of valid votes (Saturday polls: 25%). Both candidates will participate in the runoff, scheduled for October 28th. The gap between the two candidates in the first round was 17pp, and the rejection rate of both appeared at similar levels in recent polls (between 40% and 45%). We showed in recent reports that, in previous elections, votes in the first round minus the rejection rate had a strong correlation with votes in the second round. In addition, assuming that all who voted for Bolsonaro in the first round will also vote for him in the second round, he is only 4pp short of the victory.
 

We recommend receiving DI Jan 21 outright at 8.96% (reference price). The yield curve remains very steep, although rates are rallying today, while the output gap remains wide, and non-tradable inflation stands at substantially low levels historically. With the election uncertainty declining, we believe rates are likely to shift downwards.

MEXICO: Banxico was more hawkish than expected last week, causing local rates to widen significantly more than in the rest of Latam. Our 5Y FX-hedged TIIE receiver now posts a 41bps loss. The market now prices in around 20bps in hikes in the next 3 months, which is not our base case. Given that we see the recent pickup in inflation as temporary, NAFTA renegotiation was concluded, and rates are already at high levels historically, we expect Banxico to stay on hold in upcoming meetings. We thus keep our FX-hedged receiver.

This week, keep an eye on September’s CPI (Tue.).



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