Itaú BBA - Weekly Fixed Income LatAm Strategy: Another strong USD trade this week?

Latam FI Strategy Monthly

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Weekly Fixed Income LatAm Strategy: Another strong USD trade this week?

June 11, 2018

Keep an eye on the Fed meeting, and the behavior of Latam currencies this week.

All LatAm: We expect the Fed to hike the policy rate by 25bps to 1.75%-2.0% and median dots to move up to 4 hikes in 2018 in its meeting on Wednesday. In our view, the Fed must continue to tighten policy gradually to bring GDP growth back to potential, as unemployment rate is low (3.75%), core inflation is close to 2% target, and financial conditions remain favorable and continue to suggest 2.75%-3.0% GDP growth.

The Fed hike and guidance could continue to support USD against EMFX, and it will be important to monitor the behavior of Latam currencies. Since the USD started to visibly strengthen in mid-April, BRL, MXN and ARS have been underperforming, while CLP and COP outperformed.

BRAZIL: BRL appreciated substantially on Friday after BCB governor announced USD 24.5 billion in swap offers until the end of this week, and indicated that the stock of swaps may go beyond the record-high position of USD 115 billion. If the announcement is delivered in full, the total swap stock will already surpass USD 60 billion by the end of this week.

We believe the Copom’s base-case continues to be to keep the Selic rate stable in upcoming meetings, while offering swaps to improve liquidity in the market and contain BRL depreciation.

The Datafolha electoral poll out last weekend showed no major change relative to earlier surveys, and was conducted after the truck drivers’ strike. This week there will be a full batch of indicators related to April (before the transportation stoppages), and also the release of paper cardboard sales in May, with further signs on the impact of the transportation stoppages.

COLOMBIA: Front-end local rates have been moving slightly upwards, and the market now prices in close to no rate cuts in the short term, and almost 70bps in hikes in 1 year. Our position received in 18m IBR rates currently bears a 0.09% loss. We will keep the position, as we expect one additional 25-bp cut and see no need to hike rates going forward, as the economy continues to grow below potential and inflation is converging to the 3% target.

This week, keep an eye on economic activity data for April (Fri.). We expect industrial production to increase 7.0% year over year (-1.4% in March), partly hit by three additional working days as well as a low base of comparison. Retail sales likely gained 4.5% in twelve months (4.7% in March), aided by the sustained period of a stronger Colombian peso and expansionary monetary policy.


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