Itaú BBA - Weekly Fixed Income LatAm Strategy: Time to receive Mexican local rates?

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Weekly Fixed Income LatAm Strategy: Time to receive Mexican local rates?

July 16, 2018

MXN has been appreciating substantially, but local rates have not followed the same path.

MEXICO: MXN has been appreciating substantially, but local rates have not followed the same path. The local rate curve still implies almost 25bps in hikes in the next six months, and a spot rate close to 7.3% in three years, a substantially high level in historical terms.

The main risk for a receiver position is, in our view, the global trade war, which requires some protection by selling MXN. We believe rates could be a bit lower given MXN levels, so a position received in rates and short MXN sounds attractive. The risk of U.S. overheating has declined slightly (with a 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 friendly speech.

COLOMBIA: Local rates declined a bit last week, as the market reduced expectations of rate hikes in upcoming meetings (still priced at +87bps in one year). Our position received in 18m IBR rates has been performing well recently, now posting only a 5bps loss. We will keep it as we see no need to hike rates going forward, given a still wide output gap, inflation converging to the target of 3%, and COP well behaved to high oil prices.

BRAZIL: The very front-end of local rates (DI Oct-18 and Jan-19) were relatively stable last week, and prices still imply around 38 bps in hikes in the next two Copom meetings, and 120bps in hikes in the next four meetings.

Daily price surveys are showing that inflation has started to decelerate, after a strong impact from the truck drivers’ strike in May. This is in line with our view that BCB will keep the Selic rate stable in upcoming meetings.

Rates in the belly and long-end continue to be affected by domestic uncertainties. On the political side, the main discussion has been on the likely alliances within the different parties for the October elections. The period of party conventions to determine the alliances and the candidates starts on Friday (July 20th) and finishes on August 5th.



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