Itaú BBA - Weekly Fixed Income LatAm Strategy: We continue to receive the very front-end of local rates in BZ

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Weekly Fixed Income LatAm Strategy: We continue to receive the very front-end of local rates in BZ

June 25, 2018

The decline in rates caused gains to our received position in DI Oct-18 (+0.08%, unleveraged).

BRAZIL: The very front-end of local rates (DI Oct-18) tightened last week, after the Copom decided to keep the policy rate stable at 6.50%, but current prices still imply more than 70bps in hikes in the next two meetings. The decline in rates caused gains to our received position in DI Oct-18 (+0.08%, unleveraged), and we will keep it for now, as we continue to see BCB on hold in upcoming meetings. Brazil has low external vulnerability, which in our view allows policy makers to separate FX policy from monetary policy and emphasize the inflation targeting regime.

This week, keep an eye on an electoral poll by Ibope (from Thursday onwards) and monetary policy events. Lula’s appeal to the Supreme Court will not be analyzed anymore. The Copom minutes and the CMN meeting (that will set the inflation target for 2021) are scheduled for Tuesday, and the Q2 Inflation Report will hit the wires on Thursday. We expect the minutes and the inflation report to reinforce the base-case of stable rates going forward. Regarding the 2021 inflation target, given the authorities declared preference for a target closer to 3% over the long-term, we look for the 2021 target to be set at 3.75% (from 4.0% in 2020 and 4.25% in 2019).

MEXICO: Banxico hiked the policy rate by 25bps to 7.75% (in line with our call) and signaled further tightening. In our view, the communication indicates that, unless risks related to NAFTA, domestic policy after the election and monetary policy in the U.S. moderate, another hike is likely in August. Still, monetary policy is already at tight levels, so in our view the policy rate is unlikely to peak above 8.0%.

The local yield curve currently implies around 25bps in hikes in the next 6 months, and a spot policy rate as high as 7.5% in 3 years. These levels are attractive, in our view, but since global trade tensions continue to escalate, we are not yet inclined to receive.

COLOMBIA: We expect Banrep to keep the policy rate stable at 4.25% (Fri.). Recent remarks from central bankers hint that the easing cycle is very close to the end (if not ended) and any additional rate cut will be data dependent. Given that May inflation data was broadly in line with expectations, inflation expectations edged slightly up and activity is recovering, we expect the board to keep the policy rate steady at 4.25%.

The local yield curve currently implies no rate cuts in the short term and around 80bps in hikes in 1 year. Our position received in 18m IBR rates currently bears a 0.24% loss. We will keep the position, as we see no need to hike rates going forward, because the economy continues to grow below potential and inflation is converging to the 3% target. The risks for the trade involve FX depreciation caused by the strengthening USD against all EMs, and a possible strong acceleration of economic activity, given the high level of oil prices. 

 

 



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