Itaú BBA - Weekly Fixed Income LatAm Strategy: Argentina hikes 300bps while Colombia resumes easing
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Weekly Fixed Income LatAm Strategy: Argentina hikes 300bps while Colombia resumes easing

April 30, 2018

Colombia reduces its policy rate by 25bps unanimously, as Argentina sharply hikes its policy rate by 300bps

COLOMBIA: Banrep reduced the monetary policy rate by 25bps in April - the first unanimous decision since December 2017. The board highlighted that inflation surprised to the downside in March and that, despite some positive signs at the margin, growth is still below potential. Still, the press release shows the board is on data-dependency mode, so additional rate cuts cannot be ruled out. However, Finance Minister Cárdenas voted for a 25-bp rate cut rather than the 50-bp decrease he advocated prior to today’s meeting - justifying the change on recent favorable activity data. As well, General Manager Echavarría hinted that the current policy rate level is already expansionary

Our receiver position on the 18-month IBR rate) now posts a +0.35% return. The market prices in 11bps in rate cuts over the next 3 months, close to our forecast for the policy rate (at 4.00%), which reduces the potential gain in the short term.

This week there are no important macro data on the schedule.


The central bank increased its policy rate (7-day repo) by 300-bps in an inter-meeting decision, to 30.25%. The pressure on international reserves was the main factor behind the decision. In the brief press release announcing the decision, the central bank said “it is ready to act again if necessary.” Thus, the behavior of exchange rate in the near future will be a key determinant of monetary policy. Considering the rate increase already implemented, we think CPI data will play a less important role over the next few decisions.

We remain constructive on Argentina’s fiscal correction, and express this view through an overweight position on Argentina’s 5y CDS (see table below). 

This week there are no important macro data on the schedule.

MEXICO: Prices continued to trend down in the first half of April (registering a 0.35% bi-weekly deflation). In our view, CPI dynamics are turning more benign – we expect inflation to decrease to 3.7% in 2018. Moreover, Central Bank Governor Alejandro Díaz de León argued this week the MXN does not need more FX intervention, as recent pressures on the exchange rate has probably been associated both to external (stronger multilateral US Dollar) and local (elections) factors. Finally, the minutes of Mexico’s most recent monetary policy asserted the majority of board members see the current policy stance as consistent with the convergence of inflation to the target. Thus, we consider additional rate hikes unlikely – our forecasts for year-end policy rate stand at 7.0% (for 2018) and 6.0% (for 2019).

Our outright receiver on 3y local rates remained stable this week (current P&L: -0.370%). We will maintain the position (3y rate now at 7.49%), as we expect NAFTA renegotiation to be concluded soon and rates to normalize ahead as disinflation gains traction.

This week, keep an eye on GDP flash estimates (Mon).

BRAZIL: FX and interest rate markets remained volatile this week, due in our view to a combination of low carry and election uncertainty starting to kick in.

We have no position in Brazilian local rates today, mainly because of election uncertainty that may increase going forward.

This week, keep an eye on the industrial production release (Thu.). 

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