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Weekly Fixed Income LatAm Strategy: A possible decline in trade-war risk would benefit Mexico and Ch

August 20, 2018

Keep an eye on global trade negotiations this week


Luka Barbosa,
Ciro Matuo, CNPI,

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ALL LATAM: U.S.-China trade negotiations resume in Washington this week. There is low expectation of an agreement soon, but risk may start to de-escalate, as the negotiations may mitigate the 2nd round of tariffs (U.S. 25% on USD 200bn / China’s 5-25% on USD 60bn) to be implemented by mid-September. The 1st round of 25% in tariffs on USD 50bn is expected to be fully implemented on August 23.

NAFTA talks are also expected to continue this week. U.S. and Mexico are said to be closer on several topics, but sunset clauses remain an important unresolved issue.

While an improvement in NAFTA negotiations would certainly benefit Mexico, a possible reduction in trade-war risk between U.S. and China would have a meaningful impact on Chile. Trade-war has caused cooper prices to decline substantially since early June. If this risk declines, we would expect some CLP appreciation, a stronger pick-up in Chilean growth, and higher rates.

BRAZIL: Local rates tightened slightly last week, but the yield curve remains substantially steep, mainly because of domestic uncertainties. Prices imply almost 90bps in rate hikes until the end of the year, with a 18bps hike priced for the September Copom meeting already (before the Presidential elections in October).

Electoral polls are on the spotlight this week. According to the Superior Electoral Court (TSE), two nationwide presidential polls (from Ibope and MDA), are expected to be released today. A series of regional polls (including the state of São Paulo) conducted by Ibope are also expected to be released today.

MEXICO: USDMXN stabilized last week, but rates widened a bit, causing losses to our 5Y TIIE receiver. MXN has been appreciating against the USD since mid-June, but local rates have not been following the same path. The recent pick-up in inflation, which we believe is temporary, may be contributing to keep rates higher. We believe the decoupling between FX and rates will be short-lived and continue to play this by receiving the 5y TIIE rate and long USDMXN.

This week keep an eye on a batch of economic activity indicators and CPI inflation for the first half of August (see forecasts below).

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.


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