Itaú BBA - Weekly Fixed Income LatAm Strategy: Focus on CPI releases in Mexico and Colombia, and NAFTA news

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Weekly Fixed Income LatAm Strategy: Focus on CPI releases in Mexico and Colombia, and NAFTA news

June 4, 2018

The pricing of local rates in Mexico seems excessive, but now is not the right time to receive.

MEXICO: Local rates continued to widen and MXN depreciated last week, due to (1) lack of a NAFTA deal; (2) electoral polls showing that AMLO is more likely to win Presidency and increase the weight of his party in Congress and (3) higher U.S. interest rates. Mexico’s local curve now prices in 30bps in rate hikes over the next 3 months and a policy rate above 7.4% in the next 3 years. While we believe this pricing is excessive, we acknowledge that now doesn’t seem the right timing to receive rates.

We now expect Banxico to hike by 25bps to 7.75% on June 21st, because the risks have intensified. The Fed will almost surely continue its tightening cycle in June (especially after Friday’s strong payroll report), recent news flow on trade relations with the U.S. has been negative, and uncertainty over domestic economic policies after the Presidential elections is rising. The fact that the economy has performed better than expected with tight labor market conditions also gives the central bank degrees of freedom to tighten monetary policy further.

Despite election risks, if a NAFTA deal is reached, we will receive Mexican rates outright. Inflation is declining considerably, which in our view would already be consistent with rates normalizing going forward, if it weren’t for the risks mentioned above. A NAFTA deal would, in our view, reduce or eliminate a substantial structural risk for Mexico. In this case, Banxico would not hike in June, and rates in the belly of the curve would tighten substantially. Today, we have no position in Mexican local rates.

This week, keep an eye on news related to NAFTA, and May’s CPI release on Thursday. We expect the CPI at -0.20% mom (4.47% yoy, from 4.55% in April), driven by a sharp decline of regulated electricity prices.

COLOMBIA: Front-end local rates were broadly stable last week, as the market prices in 12bps in rate cuts over the next 3 months, and almost 60bps in hikes in 1 year. Our receiver in the 18-month IBR currently bears a small 0.02% loss. We will keep the position, as we believe non-tradable inflation will continue to decline going forward, which opens the doors for one more 25bps cut.

CPI inflation for May will come through on Tuesday, for which we expect a 0.30% gain, taking annual inflation to 3.2%.

BRAZIL: Local assets remain quite volatile, because of a more complex external scenario and uncertainty regarding domestic macro policy. We have no position in local rates today, especially because of the latter reason.

PERU: We expect BCRP to maintain the policy rate stable at 2.75% on Thursday, given the stimulus already implemented, even though low inflation provides the board room to cut.



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