Itaú BBA - Weekly Fixed Income LatAm Strategy: BCB to keep Selic rate stable at 6.5%

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Weekly Fixed Income LatAm Strategy: BCB to keep Selic rate stable at 6.5%

June 18, 2018

We believe BCB will keep the Selic rate stable this week

BRAZIL: We believe BCB will keep the Selic rate stable this week, and therefore recommend receiving the DI October 2018. We also recommend a small short BRL position to hedge against a strong currency depreciation that could cause BCB to hike.   See further details on our trade idea here.

MEXICO: The Central Bank’s board will meet on Thursday to decide on the reference rate, and we expect a 25-bp hike. Given more severe risks for the exchange rate (and inflation) – namely, the greater uncertainties associated with NAFTA (no deal before the elections), economic policies after the presidential elections and tighter monetary policy in the U.S. – we expect the board to take the reference rate to 7.75% from 7.50%.

We have no position in Mexican local rates today.

COLOMBIA: Iván Duque was elected President with 54% of the vote, against 41.8% of Gustavo petro. He will take office on August 7, and will have to deal with a manifold of challenges, including the need for fiscal consolidation, the implementation of the peace deal with former rebel group FARC, and bringing Colombia back to potential growth. President elect Duque spoke during the campaign in favor of cutting corporate taxes to boost growth, but fiscal constraints might keep the offer on the shelf for the time being.

Strong economic activity figures released last Friday reduced the odds of another rate cut at the June 29th meeting. Retail sales expanded 6.3% year-over-year in April (5.5% in March), in between our 4.5% forecast and the 6.7% Bloomberg market consensus. Meanwhile, industrial production grew 10.5% year-over-year (-1.2% in March), well above the Bloomberg market consensus of 5.6% and our 7.0% estimate. The figures were favored by three additional working days compared to last year. Nevertheless, even after adjusting for calendar and seasonal effects, activity was solid.

Front-end local rates have been moving upwards, and the market now prices in no rate cuts in the short term, and 80bps in hikes in 1 year. Our position received in 18m IBR rates currently bears a 0.20% loss. We will keep the position, as we see no need to hike rates going forward, because the economy continues to grow below potential and inflation is converging to the 3% target.


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