Itaú BBA - Weekly FI LatAm Strategy: We continue to receive local rates in MX (FX hedged) and CO (outright)

Latam FI Strategy Monthly

< Back

Weekly FI LatAm Strategy: We continue to receive local rates in MX (FX hedged) and CO (outright)

August 27, 2018

We have no position in Brazilian local rates since the end of June, because of the domestic uncertainties

BRAZIL: BRL weakened significantly last week, despite the slight depreciation of the USD against other EMs, and local rates widened. The market now prices in a 25-bp hike in the Selic rate in September (before the Presidential elections in October), and substantial rate hikes after that as well. We have no position in Brazilian local rates since the end of June, because of the domestic uncertainties.

Electoral polls out last week showed voting intentions on Lula (PT) rising to between 37% and 39%. Fernando Haddad’s (PT) share of voting intentions stand at 4%, but the Datafolha poll shows that 31% would vote on someone supported by Lula, and only 17% already believe Lula will appoint Haddad as his substitute.

MEXICO: Local rates tightened last week, and MXN appreciated slightly. We still believe rates are too high given current FX levels. The recent pick-up in inflation, which we believe is temporary, may be contributing to keep rates higher. Inflation accelerated in the first half of August, but core inflation remains well-behaved. Our position received on the 5y TIIE and long USDMXN currently posts a 18bps loss (-21bps a week ago).

This week keep an eye on Banxico’s inflation report, scheduled for Wednesday.

COLOMBIA: Our 1-year IBR receiver currently posts a 17bps gain. We will keep it as we see the rate hikes priced in the curve (+80bps in one year) as excessive, given the still wide output gap and inflation close to the 3% target.

On Friday, the board of the central bank will hold its non-decision making monetary policy meeting. We do not see the board in any haste to modify the policy rate. Optimism for the activity recovery ahead, potential inflation risks and the likely caution over the external situation suggests stable rates for the time being.

 

 



< Back