Itaú BBA - Weekly Fixed Income LatAm Strategy: Waiting for a Nafta deal to receive Mexican local rates

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Weekly Fixed Income LatAm Strategy: Waiting for a Nafta deal to receive Mexican local rates

May 21, 2018

We will receive Mexican rates if/when a Nafta deal is announced.

MEXICO: MXN depreciated further and rates widened last week, as the global sell-off continued. Market prices currently imply 25bps in rate hikes over the next 3 months and a spot rate as high as 7.4% in the next 3 years, which we believe is excessive.

Banxico kept the policy rate at 7.5%, and we believe the next rate move in Mexico will likely be a cut, although the tone of the statement remained cautious and additional rate increases in the near term can’t be completely ruled out. Given there is still no deal on NAFTA, the deteriorating external financial conditions and the uncertainty over economic policies after the presidential elections, there were risks of a hike. Importantly, the decision was unanimous, so the two more cautious board members also agreed to remain on hold. The central bank under the new governorship has placed more importance on inflation targeting, and last week’s decision was in our view an important signal that indeed it is willing to be less reactive than before to the Mexican peso and to events that pose risks for the currency (such as Fed hikes).

We have no position today in local rates, but will receive 3y rates outright when/if a Nafta deal is reached and global financial conditions calm down. We believe declining inflation (already below 2.5% in the last 3 months seasonally-adjusted and annualized) is consistent with rates normalization going forward.

This week keep an eye on Nafta headlines, economic activity and inflation data in Mexico. We expect CPI for the first half of May (Thu.) to reach -0.25%.

COLOMBIA: Local rates have also been widening, in line with the global sell-off. The market now implies no rate cuts in the next months, and almost 60bps of rate increases in 1 year. The widening of local rates caused losses to our 18m IBR receiver, with the P&L now at 0.0%. On Friday, central bank governor Echavarria presented the inflation report, and argued that the current monetary policy stance is already “pretty expansionary” but Banrep could perhaps cut rates one more time.

We will maintain our 18m IBR receiver as we believe there is room for one further 25-bp rate cut, judging by declining inflation and a negative output gap.

BRAZIL: BRL depreciated and local rates widened substantially last week on the global sell-off and BCB’s decision to maintain rates on hold. This week the Copom minutes (Tue.) will shed more light on last week’s decision. The market will also focus on voting intention polls for the October elections, expected to be released from Tuesday onwards.

We have no position in Brazilian rates today.



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