Itaú BBA - Weekly Fixed Income LatAm Strategy: We continue to receive DI Jan-21 rate in Brazil
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Weekly Fixed Income LatAm Strategy: We continue to receive DI Jan-21 rate in Brazil

March 26, 2018

We continue to receive Brazil DI Jan 21, because we believe a wide output gap will maintain inflation well contained

BRAZIL: The front-end and belly of DI rates rallied last week after BCB surprisingly decided to communicate that another 25-bp cut to 6.25% is likely in its next policy meeting, scheduled for May. The committee decided to add more stimulus to the economy with a view towards mitigating the risk of a slower than anticipated convergence of inflation to the target. The market, which was expecting the cut to 6.50% to be the last one, adjusted to the new indication and now prices in additional 22bps in cuts over the next 3 months.

The rally made additional gains to our outright receiver in DI Jan 21 (current P&L: +2.12%). We will keep the position because we believe a large output gap will maintain inflation well contained (possibly below the base-case scenario of 3.5% this year) and Selic rate will remain low for a longer time than what is embedded in the curve. The yield curve is quite steep with the market pricing in 308bps in hikes in the next 2 years and 392bps in hikes over the next 3 years.

This week, keep an eye on the Copom minutes (Tue.) and inflation report (Thu.) for extra clues on monetary policy. Political news flow is also important, as the deadline for those joining the Presidential race to leave executive positions and join parties is approaching (April 7).

COLOMBIA: IBR rates continue to price in 25bps in rate cuts over the next 6 months, even after Banrep decided to maintain rates on hold and did not commit to any easing bias for upcoming decisions. The 18-month IBR rate increased only 5bps in the week (to 4.48%) and our receiver still makes a positive gain of 0.10% (down from 0.17% a week before).

We will maintain our receiver position on the 18-month IBR rate, because we expect rate cuts to resume in April as inflation continues to fall, amid weak activity and a strong Colombian peso. The narrower current account deficit and the fact that - in the central bank’s view - the policy rate is only slightly expansionary, alongside the perception that political risks could have diminished after the March 11 vote, also strengthen the case for further monetary easing. However, we acknowledge that with only one board member voting to cut interest rates this month, the board could be a bit more reluctant to cut interest rates than we previously thought. So we see risks that the central bank delays the decision to cut the policy rate.

A relatively empty week lies ahead for Colombia, as February’s unemployment rate (Wed.) is the only relevant macro indicator on the pipeline.

MEXICO: As inflation declines (link) and the MXN remains stable TIIE rates have been falling and, as we expected, rates in the belly are declining a bit faster than in the front-end. Last week, the 1y rate declined 2bps to 7.89% while the 3y rate dropped 4bps to 7.51%, making further gains to our position paid in the 1y and received in the 3y (current P&L: +0.15%). We will maintain the position and will switch to an outright receiver if/when the risk events (Presidential election and NAFTA renegotiation) pass without major turbulence on the MXN.

A batch of macro indicators will come through early in the week: retail sales (Mon.), trade balance and unemployment rate (Tue.) and fiscal results (Wed.).  

ARGENTINA: The central bank will likely remain on hold in its biweekly monetary policy meeting on Tuesday. The central bank left its benchmark interest rate (7-day repo rate) unchanged at 27.25%, for the third consecutive time at its first monetary policy meeting held in March. The tone of the latest statement was once again cautious, signaling no willingness to cut interest rates in the short term. We do not expect changes in the next meeting given the challenging inflation environment, amid wage negotiations.

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