Itaú BBA - Weekly Fixed Income LatAm Strategy: Receive Mexican rates outright
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Weekly Fixed Income LatAm Strategy: Receive Mexican rates outright

April 16, 2018

We are receiving outright 3y TIIE rates at 7.37 for Mexico

MEXICO: We are receiving outright 3y TIIE rates at 7.37%. Banxico maintained the policy rate at 7.5%, supporting our view that the tightening cycle has ended, although the board maintained a cautious tone and the possibility of further hikes. We believe Mexican rates will normalize ahead, as disinflation gains traction, NAFTA renegotiation seems to be heading for conclusion and it is becoming more likely that AMLO may win the election without a deterioration in the market.

This week there are no important macro data on the schedule.

BRAZIL: The DI local rates curve steepened substantially by the end of last week, with the market reflecting a combination of slower-than-expected economic activity figures and election concerns. Election uncertainty seems to be rising, especially because of the significant number of potential candidates in the center, as reported by local newspapers such as Valor Econômico.

We took profits on our DI Jan 21 receiver (2.0% gain) and have no position in Brazilian local rates.

COLOMBIA: The front-end of IBR rates tightened substantially last week, as the market prices in that Banrep will resume easing. Inflation is declining considerably, as we expected, and some board members such as Echavarría, Ocampo and Cárdenas came to the wires last week with signals that Banrep will engage in further rate cuts.

The decline in rates caused additional gains to our 18m IBR receiver, now posting a +0.47% return (+0.29% by the end of the previous week). We will maintain the position. The market already prices in 34bps in rate cuts over the next 3 months, which reduces the upside of the trade in the very short term. But we still expect Banrep to cut by more than what is priced in, as we forecast the policy rate to reach 4.0% (from 4.5% currently).

This week, keep an eye on economic activity indicators, such as industrial production and retail sales (Mon.), and the coincident activity indicator (Fri.).


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