Itaú BBA - Weekly Fixed Income LatAm Strategy: Receive 5y rate in Mexico with FX hedge

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Weekly Fixed Income LatAm Strategy: Receive 5y rate in Mexico with FX hedge

July 23, 2018

The main risk for a receiver position is, in our view, the global trade war, which requires some protection by hedging FX

MEXICO: Local rates declined a bit last week, but levels are still attractive, with the market pricing in 12bps in hikes in the next three months, and a spot rate close to 7.2% in three years, a substantially high level historically.

The main risk for a receiver position is, in our view, the global trade war, which requires some protection by hedging FX. We believe rates could be a bit lower given MXN levels. We are entering the position with the 5y rate at 7.82% and USDMXN at 19.08. The risk of U.S. overheating has declined slightly (with softer U.S. payroll and CPI data), and the risk of a shift in domestic macro policy is relatively contained for now by AMLO’s market-friendly speech.

This week, keep an eye on CPI inflation for the first half of July (Tue.), for which we expect a 0.22% increase.

COLOMBIA: We expect Banrep (Fri.) to keep rates stable at 4.25%. We also see the board reinforcing the message that additional rate cuts are unlikely, but there is also no rush to start the normalization cycle.

Local rates have been declining, but the market still prices in 76bps in hikes in one year, which we believe is excessive. Our position received in 18m IBR rates currently posts a 7bps gain.

BRAZIL: The highlight of the week will be on the political side. According to local news (Folha de S. Paulo), the parties from the so-called “big-center” (PP, DEM, PR, SD and PRB) have decided to build an alliance with the PSDB (of pre-candidate Geraldo Alckmin). The formal announcement is expected for Thursday and, if confirmed, will take the share of TV and Radio campaign time of the PSDB alliance to almost 50%.

BRL and local rates rallied on Friday. The market has already eliminated any rate hike in the next Copom meeting, but still prices in 100bps in hikes until year-end.



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