Itaú BBA - Weekly Fixed Income LatAm Strategy: Copom and Banxico to keep rates stable

Latam FI Strategy Monthly

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Weekly Fixed Income LatAm Strategy: Copom and Banxico to keep rates stable

July 30, 2018

We continue to receive Mexican 5y local rates, with FX hedge

BRAZIL: We and the market believe the Copom will keep rates stable at 6.50% on Wednesday. The BRL has been more stable recently, without additional central bank intervention, and economic activity data have been disappointing. This should be consistent with inflation near the target in the scenarios that assume a stable Selic rate going forward, signaling no need to increase rates in the near future.

The front-end of local rates continued to decline last week, and prices now imply only 15bps in hikes in the two meetings before the Presidential election (almost no hike in this week’s meeting). After the election, however, substantial rate hikes are still priced in.

We have no position in Brazilian local rates today, after a positive trade received in the front-end of the curve.

MEXICO: We expect Banxico to keep rates stable at 7.75% (Thu.), and continue to receive 5y local rates, with FX hedge. The MXN has appreciated strongly since the last meeting, NAFTA renegotiations are regaining momentum, AMLO and his team are not signaling macro policy shifts, and recent inflationary pressures have been concentrated on a few items (largely fuels).

Local rates have not declined recently, despite MXN appreciation. The market still prices in 22bps in hikes in the next three months, and a spot rate near 7.4% in three years, a high level in historical terms. Banxico keeping the policy rate stable this week could trigger some tightening of local rates in our view. Our position received in the 5y rate with FX hedge currently posts an 11bps loss, and we are keeping it.

COLOMBIA: The front-end of local rates have been declining since early July, as the market is gradually eliminating the rate hikes prices in the curve. Our position received in the 1-year rate currently posts a 16bps gain. We will keep it as prices still imply 60bps in hikes in one year.

Banrep kept the policy rate stable at 4.25% in July, as expected. The statement was neutral as it balances upside inflation risks with a still widening output gap. We do not see the board in any haste to modify the policy rate for the time being.

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