Itaú BBA - Weekly FI LatAm Strategy: Taking profits in our Colombia vs. Chile trade idea
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Latam FI Strategy Monthly

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Weekly FI LatAm Strategy: Taking profits in our Colombia vs. Chile trade idea

March 11, 2019

We are taking profits on the trade with a 15bps gain.

CHILE, COLOMBIA: We are taking profits in our position received in Colombia’s 1-year local rate and paid in Chile’s 1-year local rate with a 15bps gain. Our view when we recommended the trade was that there were too many rate hikes priced in Colombia, whereas in Chile the market was underestimating the size of the tightening cycle. Since we entered the trade by the end of January, local rates in EM as a whole tightened, but Colombia’s 1-year rate dropped by 14bps while Chile’s declined by only 4bps. Today, the market prices in a high probability of rates being stable in both countries in the next months, so in our view prices are more in line with fundamentals now.

BRAZIL: Local rates in Brazil were the only ones in LatAm that did not see substantial declines last week (see charts), as the market remains uncertain about the pension reform process. The weekend news flow (Estadão) took a more positive tone, as reportedly President Bolsonaro and Lower House Speaker Rodrigo Maia agreed on a strategy to negotiate with Lower House members in order to improve the chances of pension reform approval. The CCJ (Constitutional and Justice Committee) in the Lower House is scheduled to be formed on Wednesday this week and the market will be monitoring this closely, as the CCJ formation is required for the pension reform to begin advancing.

The week will also be busy on the data front, with February’s IPCA inflation on Tuesday and the first hard data for 2019 on Wednesday, Thursday and Friday. We expect inflation to remain at comfortably low levels and activity data to confirm the impression that the economy started the year on a weak pace.

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