Itaú BBA - Weekly Fixed Income LatAm Strategy: Chilean Central Bank to remain on hold

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Weekly Fixed Income LatAm Strategy: Chilean Central Bank to remain on hold

September 3, 2018

Trump’s decision on tariffs against China will be the highlight of the week.

All LatAm: All eyes are on Trump, who last week appeared reportedly in favor of tariffs on USD200bn imports (perhaps to be announced on Sept. 6th). There is no indication yet on the size of tariffs (10% or 25%) nor if the administration will enact tariffs on the $200bn at once or in installments. If Trump decides for an immediate full escalation (25% tariffs on $200bn), the risk is for a sell-off. If Trump decides for an incremental approach (10% on $50bn), risk sentiment may improve.

CHILE: We and the market expect the central bank to keep the policy rate on hold at 2.5%. We believe the current risk-off global sentiment and the controlled inflationary pressures are factors that will make the central bank move away from bringing forward the start of the planned normalization cycle. There is no expectation of rate hikes this week, but local rates imply around 10bps in hikes over the next three months and 30bps over six months, which may not materialize if the global scenario remains challenging. In fact, Chilean local rates were the only ones in Latam that declined last week (see charts).

BRAZIL: Markets remained volatile last week, on global and domestic concerns, and the local rates curve became even steeper (see chart). The market prices in a 25-bp rate hike in the September Copom meeting (before the Presidential elections in October) and a substantial tightening cycle after that. We have no position in Brazilian local rates today.

COLOMBIA: Rates widened only slightly last week, causing small losses to our receiver position (current gain: +15bps, down from +19bps the week before). Colombia remains the only country where we have an outright (unhedged) receiver. Prices still imply 70bps in rate hikes in one year, which we believe is excessive given the still wide output gap, headline inflation around the 3.0% target, and declining non-tradable inflation.

MEXICO: Our recommendation to receive the 5Y TIIE rate and long USDMXN still bears a 21bps loss, because the tightening of local rates that we believe should follow the more appreciated FX has not happened yet. One reason for rates being still at very high levels may be the recent pick-up in inflation, which we believe is temporary.


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