Itaú BBA - Weekly Fixed Income LatAm Strategy: Banxico to hike; in Brazil, all eyes on the new economic team

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Weekly Fixed Income LatAm Strategy: Banxico to hike; in Brazil, all eyes on the new economic team

November 12, 2018

We expect Banxico (Thu.) to hike by 25bps to 8.0%, and do not rule out a 50bps increase

MEXICO: Local rates continued to sell off last week, with the highlight being the 5-year TIIE rate rising 14bps to 8.84%. The deterioration continues to be caused by domestic policy concerns. By the end of the week, AMLO announced that no banking or fiscal policy shifts will be done in the beginning of the government, but more convincing actions seem to be necessary to contain further deterioration. Although rates are at historically-high levels, we have no position in Mexican local rates today.

We expect Banxico (Thu.) to hike by 25bps to 8.0%, and do not rule out a 50bps increase. Recent MXN depreciation, due to uncertainty on the new administration’s policy direction, and inflation above the target, are the reasons behind further tightening.

BRAZIL: The rally in local rates finally ended (or took a pause) last week. The front-end and the belly were mostly unchanged, while the long-end widened between 20 and 40bps. We took profits on our DI Jan 21 receiver last Wednesday, after a strong gain, and are waiting for clearer signs on the reformist agenda to receive real rates in the belly and the long end of the curve, which are still very attractive.

This week all eyes are on the formation of the new economic team. Local news (Estado) indicate that Joaquim Levy will be the new head of BNDES, and that Mansueto Almeida will remain at the Finance Ministry. However, the main uncertainty is still centered on who will be the BCB President, so any headlines on that front will be closely monitored.

 

 



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