Itaú BBA - Weekly Fixed Income LatAm Strategy: Watch out for policy rate decisions in Brazil and Colombia

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Weekly Fixed Income LatAm Strategy: Watch out for policy rate decisions in Brazil and Colombia

March 19, 2018

We continue to be received in the belly of the local rates curve in Brazil and the front-end in Colombia.

STRATEGY TEAM:
 

Ciro Matuo, CNPI, ciro.matuo@itaubba.com
Luka Barbosalbarbosa@itaubba.com
Eduardo Alonsoeduardo.marza@itaubba.com

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BRAZIL: BCB has another SELIC rate decision on Wednesday. We and the market expect a 25-bp cut to 6.50%. The statement, in our view, may indicate that they intend to interrupt the easing cycle. Reports on imminent reserve requirement cuts also suggest the authorities may want to shift their focus on the functioning of the credit channel, rather than on adding more stimuli to the economy. The local yield curve flattened last week, with rates from the 3y onwards declining and the front-end broadly stable. The movement is consistent as we approach the end of the easing cycle. Despite the improvement, the curve is still very steep, with the market pricing in 294bps in hikes over the next 2 years and 362bps in 3 years. We maintain our outright receiver in DI Jan 21, with a current gain of 1.73%.

The weekend news flow remained focused on the political movements for the 2018 Presidential race. PSDB’s Alckmin candidacy got a much needed boost, as reports indicate that Senator Antonio Anastasia (PSDB-MG) has decided to seek the Minas Gerais governorship. This, if confirmed, should provide Alckmin with a powerful ally in Brazil’s second largest state. In addition, João Dória, another ally from PSDB, won the party’s state primary on Sunday and is likely to run for governor of São Paulo. On the left-wing side, there are some reports on a possible deal between the PT and Ciro Gomes (PDT-CE), who would presumably lead the left in case former-president Lula is out of the race. There are also indications, however, that the PT as a party is not willing to accept such deal.

COLOMBIA: Banrep will also hold a monetary policy meeting on Tuesday. Our baseline is that rates will remain on hold, but we do see significant risks of a 25-bp cut. We expect a dovish statement, as inflation is on a clear downward trend, and the market to continue pricing in rate cuts in coming months. We see the policy rate reaching 4.0% at the end of this cycle (currently 4.5%). The market has recently priced in further cuts, now at 25bps over the next 3 months. We continue to receive the 18-month IBR, with a current gain of 0.17%.

MEXICO: We expect CPI for the first half of March (Thu.) to post 0.19%, driven by higher prices for core services and non-core foods. The 12-month reading should decrease to 5.07% yoy, from 5.23% in February. As inflation normalizes, we believe monetary policy should normalize going forward as well. We continue to pay the 1y rate and receive the 3y rate (current gain of 0.13%) and will switch to an outright receiver position if/when the risk events (Presidential election and NAFTA renegotiation) pass without major turbulence on the MXN.

CHILE: We expect the central bank to maintain the policy rate at 2.5% on Tuesday, as inflation was muted at the start of the year and activing is showing some recovery signs. We have no position in Chilean local rates.



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