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STRATEGY TEAM
Mauricio Oreng [email protected]
Ciro Matuo, CNPI [email protected]
Luka Barbosa [email protected]
Bruna Tomaidis [email protected]
CHIEF ECONOMIST
Ilan Goldfajn [email protected]
Please refer to page 18 of this report for important disclosures, analyst certifications and additional information. Itaú BBA does and seeks to do business with Companies covered in this research report. As a result, investors should be aware that the firm may have a conflict of interest that
could affect the objectivity of this report. Investors should not consider this report as the sole factor in making their investment decision.
Itaú Corretora de Valores S.A. is the securities arm of Itaú Unibanco Group. Itaú BBA is a registered mark used by Itaú Corretora de
Valores S.A.
Receiving Short Rates in Brazil Fixed Income Strategy
July 22, 2014
Highlights
We believe the current global scenario of high liquidity and low volatility will
gradually start reversing towards the end of the year, with the 10-year U.S.
Treasury reaching 2.90% by end-2014 and 3.5% by end-2015. As an upshot, long
yields and steepness are about to rise in LatAm.
In Brazil, economic activity continues to surprise on the downside, with both
backward- and forward-looking indicators worsening markedly across the 2Q14
(and also early in the 3Q14). We continue to see value receiving the short rates,
especially the 2017s. In real rates, we believe the 2022s offer protection against
inflation risk with a good balance between the adverse carry (with low short-term
monthly IPCA) and the risks of being long duration.
In other LatAm countries, our recommended trades reflect our views towards the
idiosyncratic monetary policy risks in the short term and a likely contraction in
global liquidity conditions as we approach the end of year. In general, we believe
markets are pricing in relatively low levels of equilibrium interest rates in Mexico,
Colombia and Chile.
In Colombia, amid risks of further overheating in the economy, our advice
is to pay the 2-year IBR swap.
In Mexico, the economic recovery seems to be firming up and we do not
expect more rate cuts. We recommend paying the 5y1y TIIE swap and
placing bets on 15s18s MBono steepeners.
In Chile, the odds for activity and rates are skewed to the downside in the
short run, so that we recommend 5y1y steepeners in Camara swaps.
On the FX side, the likely weakness of the CLP and the resiliency of the
MXN support further upside, despite the significant gains recorded by the
pair so far since 2012.
Highlights
Macro Fundamentals
Overview: Rates, FX
Trades in Brazil
Trades is Non-Brazil LatAm
Trades Target Stop
Brazil Receive Jan-17 DI, Long
NTN-F 201710.4% 11.6%
Brazil Long NTN-B 2022 5.0% 5.9%
Mexico Pay 5y1y TIIE Swap 6.7% 5.3%
MexicoMbono: Long Dec15, Short
Dec18spread: 250bps spread: 100bps
ChileCamara Swap: Receive 1y,
Pay 5y150bps 10bps
Colombia Pay IBR 2y Swap 6.0% 4.0%
FX Long MXN/CLP 46.5 42.0
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Macro Fundamentals
For a detailed analysis, refer to our LatAm Macro Monthy
Global Economy
International financial conditions have improved markedly this year, with lower U.S. Treasury yields (and interest rates
in other DMs) fostering flows to EMs and carry trades. The strong (but temporary) U.S. GDP contraction in 1Q14 is
probably a main reason behind this liquidity window seen in the first half.
Not only activity figures are improving in the World’s largest economy in the 2Q14, but also job creation is picking up
quite sharply. Better employment conditions have recently led to a slight tightening in the tone of FOMC’s
communication, with Fed Chair Yellen emphasizing that faster-than-expected declines in the unemployment rate could
prompt sooner-than-anticipated rate hikes.
We expect a continued recovery in the U.S. economy (and job market) ahead, as well as some normalization in (wage)
inflation. While the market could probably wait a few more weeks (maybe months) to see if the U.S. economy will keep
firming up across the 2H14, we believe that strong activity fundamentals (employment, in particular) will drive markets
to anticipate scenarios of Fed Fund hikes in 2015.
We believe this scenario should lead to a pick-up in 10-year U.S. Treasury (UST10y) yield to 2.9% by yearend (from
2.50% today). For 2015, our UST10y projection stands at 3.5%. In short, global liquidity conditions are poised to
gradually start reversing by December, deteriorating a bit further across 2015.
Source: Central Banks, IMF, Haver and Itaú.
Brazil
Economic activity continues to disappoint, with both backward- and forward-looking indicators worsening markedly
across the 2Q14 (and, apparently, early in the 3Q14). The widespread weakness in indicators from manufacturing,
retail, loans, employment, confidence, led us to reduce our GDP growth forecast for 2014 to 0.7%, from 1.0%.
We believe part of the confidence decline follows temporary factors. So, our full-2014 GDP projection counts on a
slightly better activity in 2H14. We expect GDP to post an annualized clip of 1.0—1.5% in the latter half, compared to
no-growth in 1H14. Still, incoming data early in the 3Q14 are still weak, imparting downside risks to our projections.
Despite a shrinking labor force, the cooling in payrolls (now at the slowest pace since 2009) should prompt a moderate
increase in joblessness, towards 5.3% by end-2014 and 5.6% by end-2015 (May 2014: 4.6%).
A less tight labor market should pave the way for some softening in services costs, a key source of inflation pressures.
Further easing in food prices is in the pipeline as well, especially for the next few months (helped by seasonality).
These downward contributions will probably be offset by a continued realignment in regulated prices, such as fuel,
public transportation, and utilities. Thus, we expect no big relief on the inflation front, despite the sluggish economy. We
project the (official) IPCA inflation index at 6.5% for both end-2014 and end-2015.
GDP Growth
World GDP growth - % -0.4 5.2 3.9 3.2 3.0 3.1 3.6
USA - % -2.8 2.5 1.8 2.8 1.9 1.6 3.0
Euro Area - % -4.3 2.0 1.5 -0.6 -0.4 1.1 1.5
Japan - % -5.5 4.7 -0.4 1.4 1.6 1.7 1.3
China - % 9.2 10.4 9.3 7.8 7.7 7.2 7.0
Interest rates and currencies
Fed Funds - % 0.1 0.2 0.1 0.2 0.1 0.1 1.3
USD/EUR - eop 1.43 1.34 1.30 1.32 1.37 1.33 1.30
YEN/USD - eop 92.1 81.5 77.6 86.3 103.6 110.0 110.0
DXY Index* - eop 76.8 80.0 79.6 79.8 80.3 81.7 81.7
2015F2013 2014F2009 2010 2011 2012
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Although inflation is expected to stroll around the upper-target, the activity slowdown should prompt the BCB to keep
the benchmark rate stable at 11% across 2015. Our call is consistent with the 2Q14 inflation report, where the authority
hinted a “flight plan” to remain on-hold, as activity is seen increasingly disinflationary. In the last policy meeting (July
16), however, the Copom kept the message that rate stability was a decision taken “at the moment”, which was
interpreted as a signal of possible rate cuts ahead, given the frail state of the economy.
The activity deceleration is hurting tax collection and dampening further the budget performance. In May, core tax
receipts have trended at the slowest pace since April 2013. As revenues disappoint and expenditure show rigidities, we
continue to expect a primary budget surplus of 1.3% of GDP for 2014 (target: 1.9%). Underlying fiscal measures (e.g.,
recurring, structural primary balance) point to an effective reading of 0.5—1.0% of GDP, insufficient to stabilize the
public debt in the long run. For 2015, we project a less expansionary fiscal stance, leading to a primary surplus of 1.7%.
On the FX front, the Central Bank has announced that its intervention program via currency swaps will be maintained at
least until the end of the year. Despite this support for the BRL, we believe tighter global liquidity and domestic policy
uncertainties will cause the FX rate to weaken to 2.40/USD by December 2014 and 2.50/USD by December 2015.
On the political front, a latest poll by Datafolha showed that the gap between president Dilma Rousseff and Senator
Aecio Neves narrowed from 7p.p. to 4 p.p. (44% Vs. 40%) in a hypothetical second-round election. A final contest
between these two candidates is the most likely scenario, according to the polls. Datafolha survey also showed that
government approval rate dropped to 32% (from 35%), and is now close to a low seen in mid-2013.
Mexico
Economic activity is now showing consistent improvement, after the weakness seen in recent quarters. In the 1Q14, the
strong contraction in the U.S. economy and the impact of tax hikes on consumer spending hurt Mexican GDP growth.
In our view, the recovery in U.S. manufacturing, the expansionary bias in monetary and fiscal policies, the effects of a
comprehensive set of reforms recently approved, all will support the recovery ahead. Our GDP growth forecasts stand
at 2.4% for 2014 and 3.8% for 2015.
We continue to see well-behaved inflation fundamentals, as the exchange rate has been stable, demand has grown
moderately, and foreign inflation has been low. While we project inflation to cross above the upper-target (4.0%) in
coming months, reflecting pressures in non-core items, our forecast is 3.7% for end-2014. Next year, the fading impact
of tax hikes should help drive inflation down to 3.2%.
With the economy seen in recovery-mode, the Banco de Mexico has signaled that “additional rate cuts are not
recommended in the foreseeable future.” We see rates stable (at 3.0%) this year, with a hiking cycle expected to begin
at the end of 2015, relatively in synchrony with the Federal Reserve Bank. We project interest rate at 3.5% for end-
2015. Risk-wise, it is important to bear in mind that Banxico’s guidance to keep interest rate on hold for now is
conditional on the activity recovery. If the Mexican economy fails to gain traction, further easing in monetary policy in
Mexico is possible, depending on the monetary policy stance in the U.S..
We project the MXN at 13.2/USD for both 2014 and 2015. Although we expect long U.S. treasury yields to rise, we do
not see room for a large depreciation of the peso. A successful implementation of structural reforms will probably attract
significant capital inflows, offsetting the hit from tighter financial conditions worldwide.
Colombia
GDP growth surprised in the upside in 1Q14 (6.4% y/y), led by construction (supply-side) and investment (demand-
side). For the 2Q14, a number of indicators (such as retail sales, household confidence) suggest that consumer
spending is poised to keep a good momentum. As an upshot, we have raised our GDP growth forecast for this year to
5.0% (from 4.5%). For 2015, our estimate stands at 4.5%, as the (lagged) effects of an ongoing monetary policy
tightening will contribute to moderate growth a bit.
Inflation retreated in June, and remains slightly below the center target (3.0%). Our newly revised growth forecast led
us mark up our inflation projections to 3.3% for 2014 (previously 3.1%) and 3.2% for 2015 (previously 3.0%).
The central bank unanimously decided to raise interest rate (by 25 bps, to 4.0%) in its June monetary policy meeting.
The statement showed that Banrep is more concerned about the inflation outlook, as it highlighted that expectations for
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one year ahead have moved higher, and that the strong GDP increased the likelihood that the economy will run ahead
of potential by yearend. We now expect the policy rate to end the year at 4.75% (previously 4.25%). The tightening
cycle will likely continue in 2015, with interest rate reaching 5.50% (previously 5.25%).
The COP has continued to strengthen following expectations of higher interest rates. This led the central bank to
accelerate interventions on the FX market, as it doubled its quarterly dollar purchases to USD 2.0 billion for the 3Q14.
Our year-end forecast for the Colombian peso is now at 1,900/USD (previously 1,950). For year-end 2015, we expect
1,970/USD (previously 2,000). While we revised our COP expectations higher due to a stronger monetary tightening,
we still project a weakening FX rate next year, amid a likely reduction in global liquidity (due to higher U.S. rates).
Chile
In May, the IMACEC (monthly GDP proxy) weakened further on a quarter-over-quarter basis, reaching 1.6%
annualized. Although unemployment remains quite low (around 6.3% in May), there are signs of moderation in the job
market (e.g., higher self-employment and diminishing job vacancies).
Slower employment, higher inflation and lower confidence hint that consumer spending is unlikely to rebound
significantly in the short run. With investment also also losing momentum, we expect the economy to grow 2.8% this
year, significantly slower than the 4.1% registered in 2013 (and the average of 5.6% recorded from 2010 to 2012). For
2015, we project activity acceleration to 4.0%, as a looser monetary policy stance starts kicking-in.
Although annual inflation remains ahead of the upper-target of 4.0%, there are signs of softening. Sequential has fallen
in June, with headline CPI rising 0.1% m/m. This reading took the year-on-year change down to 4.3%, from 4.7%. The
latest data showed easing in core inflation (ex-food, energy) and non-tradable prices. As the slowing economy and job
market start trimming the impetus of prices and wages, inflation should fall to 4.0% by end-2014, and to 2.9% for 2015.
The anemic economy and a lower monthly CPI print led the central bank to further ease the policy rate in July. The
BCCh cut rate by 25bps, to 3.75%, maintaining the easing bias. We look for another (and probably last) easing in
August, and project interest rate stable at 3.5% at least until the end of 2015.
Itau Survey Itau Survey Itau Survey Itau Survey
Real GDP growth - % 2.5 0.7 1.0 1.5 1.5 Real GDP growth - % 1.1 2.4 2.7 3.8 3.9
Unemployment Rate - year avg 5.4 4.9 5.2 5.5 5.5 Unemployment Rate - year avg 4.9 5.0 4.7 5.0 4.5
CPI - % 5.9 6.5 6.4 6.5 6.1 CPI - % 4.0 3.7 3.8 3.2 3.5
Monetary Policy Rate - eop - % 10.0 11.0 11.0 11.0 12.0 Monetary Policy Rate - eop - % 3.5 3.0 3.1 3.5 3.6
BRL / USD - eop 2.36 2.40 2.35 2.50 2.50 MXN / USD - eop 13.1 13.2 13.0 13.2 12.90
Source: BCB Focus Report (July 2014), Bloomberg monhtly survey (July 18) Source: Encuesta Banxico (July 3), Bloomberg monhtly survey (June 25)
Itau Survey Itau Survey Itau Survey Itau Survey
Real GDP growth - % 4.1 2.8 3.1 4.0 3.9 Real GDP growth - % 4.7 5.0 4.6 4.5 4.7
Unemployment Rate - year avg 6.0 7.0 6.5 7.3 6.8 Unemployment Rate - year avg 9.6 8.5 9.0 8.0 8.8
CPI - % 3.0 4.0 3.9 2.9 3.0 CPI - % 1.9 3.3 3.3 3.2 3.3
Monetary Policy Rate - eop - % 4.5 3.5 3.5 3.5 3.8 Monetary Policy Rate - eop - % 3.3 4.8 4.5 5.5 4.9
CLP / USD - eop 526 575 570 600 570 COP / USD - eop 1,930 1,900 1,950 1,970 2,000
Source: Encuesta Banco Central de Chile (July 3), Bloomberg monhtly survey (June 25) Source: Banrep's Economists Survey (July 11), Bloomberg monhtly survey (June 25)
MACROECONOMIC FORECASTS
2014E 2015E
2014E 2015E
2014E 2015E
2014E 2015EBRAZIL MEXICO
COLOMBIACHILE
20132013
2013 2013
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Overview: Rates, FX
Uncertainties about speed of U.S. recovery, signals of soft exiting by the Fed, still-expansionary monetary policies in
other DMs. Those are all elements explaining the recent yield compression in advanced economies (and in global FI
markets). In the U.S., the 10-year Treasury yield is down nearly 50bps so far this year (running below 2.50%).
Elsewhere across DMs, rates of similar maturity are falling 58bps (also towards 2.50%) year-to-date.
Local EM rates (5-year tenor) reflect this bullish environment, dropping 37bps so far in 2014, after an increase of 29bps
in the 2H13. In LatAm, the decline in 5-year rates was yet steeper (70bps), led by notable plunge of 161bps (to 11.2%)
in Brazil. The latter was the country where fixed-income assets have benefitted the most across the region, owing to the
high level of interest rate.
Volatility, as measured by the VIX index, is standing close the lowest levels in the post-recession. Marked declines are
also seen in implicit and realized volatility in EM FX rates this year. Clearly, a reflection of such low-rate environment.
The search for yields favored EM exchange rates, especially in markets where the opportunity for carry-led gains are
greater. This helps explain why the BRL stood among the top performing currencies in 2014.
(58)(50)
(75)
(26) (30)(37)
(20)
(70)
(161)
(84)
19
(56)
(22)
-200
-150
-100
-50
0
50
DM
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US
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Euro
zone
Japa
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UK
EM
's
Asia
n E
M's
La
tAm
Bra
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Ch
ile
Co
lom
bia
Me
xic
o
CE
EM
EA
Interest Rate Changes (5y Swaps)
Fonte: Bloomberg, Itaú
bps
-50 -40 -30 -20 -10 0 10 20 30
USDPENIDR
HUFCZKPLNCOPNZDBRLAUDGBPTRYRONPHPKRWMYRMXNTHBSEKCLPJPY
NOKZARARSCNYCHFBGNRUB
Year-to-Date CDS Changes (in basis points)
Fonte: Bloomberg, Itaú
PEN
COP
BRL
MXN
CLP
ARS
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We believe this scenario of easy global financial conditions will gradually start reversing towards the end of the year, as
the continued pickup in the U.S. job market will prompt the Fed to signal more clearly (and possibly sooner-than-
expected) its intention to hike rate in 2015. Since we see the 10-year U.S. Treasuries heading towards 2.90% by
December, we believe the carry-trade should turn less attractive by yearend, with long yields and steepness bound
increase in EMs and LatAm .
Currency-wise, we also look for some spillover from more restrictive international financial conditions, especially in the
EM and LatAm space. In an environment where differentiation will play a key role, we believe the MXN should be an
outperformer in LatAm, as the effects of structural reforms start to kick-in.
The reversal of tides in global financing should also change the composition of an optimal portfolio across LatAm
markets. While countries more dependent on foreign financing were the outperformers so far in 2014, economies more
dependent foreign demand (especially for manufactured goods) will probably lead the investment opportunities in
LatAm FI markets.
Considering Brazil’s greater dependence on external financing (due to its low level of domestic savings) and given
Mexico’s higher dependence on exports (due to its upstream linkages with U.S. manufacturing), a natural conclusion is
that positioning in Mexican assets could become increasingly more attractive than positioning in Brazilian assets.
But this result can be much less clear if signs of adjustments in economic policy emerge from Brazilian presidential
elections. Streamlining some key aspects of macroeconomic management in Brazil (fiscal policy, regulated prices)
would bring significant downward pressure in country-risk and long-term yields, offsetting (at least partially) the impact
of higher global interest rates.
From a tactical standpoint (i.e., focusing in the very short term), it is not advisable to heavily position now for such a
low-liquidity scenario that we envision for 2015. Especially in markets with high carry, such as Brazil. In fact, while we
see considerable downside for the BRL vis-à-vis other LatAm currencies for the end of this year, the favorable carry is a
limiting factor on the selling side.
Still, in lower-carry LatAm markets, our strategy recommendations take into account the likely steepening in yield
curves across EMs, which we expect to gradually occur in coming months. Our trading ideas also seek to explore
opportunities created by expected idiosyncratic movements in monetary policies (e.g., risks of lower interest rates in
Chile and higher interest rates in Colombia).
-8% -6% -4% -2% 0% 2% 4% 6% 8%
BRLNZDAUDIDRJPY
COPMYRGBPTHBINR
KRWPHPSGDTRYMXNPENHKDCHFTWDRONCADZARPLNDKKEURBGNCZKNOKCNYHUFSEKRUBCLP
FX Spot Returns (Year-to-Date)
Fonte: Bloomberg, Itaú
BRL
COP
MXN
PEN
CLP
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Brazil The key investment themes in Brazilian markets continue to be: (1) global liquidity and carry-trade; (2) presidential
elections and adjustments in macro policies; (3) slowdown in real activity and possible job-market effects; (4) fiscal
performance; (5) high inflation. The long list of market catalysts can potentially produce a wide range of outcomes for
local rates and FX, especially considering some binary market scenarios conditional upon the realization of some of
these variables.
The local curve seems to be pricing in slight, temporary rate cuts for 2014 (i.e., to be reversed in 2015), if we assume a
term premium of nearly 50bps per year. In the DI (futures) curve, the 1y1y forward proxy (i.e., Jan15 X Jan16) stands
around 11.00%, with the 2y1y forward proxy (i.e., Jan16 X Jan17) around 11.40%. The curve also projects a probability
just above 10% for a 50bps rate cut in September.
Source: Bloomberg (prices as of July 22, 2014)
While our baseline macro scenario projects the Selic rate stable at 11.0% (at least) until the end of 2015, the downside
risks for real activity should prompt the market to keep pricing in yet more chances of rate cuts in the short term. Thus,
we continue to see value receiving the short end of the Brazilian yield curve (see our FI Daily Report “Slow Economy
Brings Brazilian Market Rates Down”, as of June 2).
Our preferred tenor is the January 2017, due to its greater liquidity in both DI futures and nominal bond market (NTN-F).
Our simulation for alternative monetary policy scenarios show advantages of the 2017s in comparison to the January
2015 or January 2016 :
Jan-17 and Jan-16 show similar losses in alternative scenarios of 100bps rate hikes in 2015 (this scenario is
recognizably getting out of the cards now).
The Jan-17 offers better carry than Jan-16, good for scenarios with little change in rate expectations from now on.
In a scenario of rate stability, and no term premium in 2015 (possibly reflecting perceptions of slight chances of
rate cuts), the Jan-17 offers better returns than Jan-16.
The Jan-17 also outperforms the Jan-16 for scenarios where rate cuts occur with the economy largely lagging its
potential – i.e., driving unemployment higher and bringing core inflation down. In these situations, there would be
no “payback” (increase) in the Selic rate, at least in the very few months following the end of the easing cycle.
While the Jan-17 is less profitable than the Jan-16 in scenarios where rate cuts in the short-term lead to a
necessity to tighten rates further in 2015, the returns of the 17s in plausible scenarios stand around 40bps.
We recommend staying long Jan-17 DI, with target at 10.40% and stop at 11.60%. In bonds, one could go long
NTN-F 2017 with similar target and stop.
In terms of risks for this positioning, the faster the closing in the output gap and the lower the inflation pressures (or
expectations) the better. This positioning is vulnerable to a reversal in global liquidity or a hypothetically aberrant
deterioration in fiscal fundamentals this year, if any of those lead to currency depreciation, increased short-term inflation
jitters, and lesser room for rate cuts.
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Playing the long end of the Brazilian curve is a bit trickier, considering the wide range of outcomes for the interplay
between key variables such as the elections outlook (measures by the political polls) and expectations for U.S. interest
rates (measured by the UST10y). The stronger the signs of macro policy adjustments in 2015, and the smoother the
reduction in global liquidity, the greater the downside for long yields in Brazil. We believe the high level of uncertainty
requires some caution in trading duration for now.
In real rates, in order to get shelter from inflation (and from scenarios of “pre-emptive” rate cuts), we
recommend going long NTN-B 2022 (current levels at 5.60%), with target at 5.00% and stop at 5.90%. The idea is
to get inflation-protection with a better balance between an adverse carry in the short-run (due to low monthly IPCA
prints projected until September) and the risks of taking duration.
On the FX front, we are neutral on the BRL now. On one hand, our projection implies a significant upside risk for the
USD/BRL until the end of year (about 8%). But with long U.S. rates at low levels, and with the BCB poised to keep fine-
tuning the FX intervention policy so as to pursue an exchange rate around 2.20—2.25/USD, the adverse carry of being
short BRL suggest that the timing is no good to sell the Brazilian currency. Speculations about macro policy
adjustments and electoral polls are another reason for staying put in the short run.
8.0
8.5
9.0
9.5
10.0
10.5
11.0
11.5
12.0
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13.0
Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 Mar-13 Jul-13 Nov-13 Mar-14 Jul-14
Long Jan-17 DI (Futures)
Fonte: Bloomberg, Itaú
Jan-17 DI
% p.a.
target: 10.4%
3.0
3.5
4.0
4.5
5.0
5.5
6.0
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jul-12 nov-12 mar-13 jul-13 nov-13 mar-14 jul-14
Long NTN-B 2022
Fonte: Bloomberg, Itaú
NTNB 2022
% p.a.
target: 5.0%
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Non-Brazil LatAm
Our trading ideas for other LatAm markets reflect our views towards idiosyncratic monetary policy risks in the short term
and a likely contraction in global monetary conditions expected to happen by yearend (and into 2015) , causing curves
to re-steepen across the board in the region. The lower carry in LatAm economies such as Mexico and Chile creates an
opportunity to buy some relatively cheap insurance against a reversal of global liquidity.
In Colombia, considering our below-consensus call for the unemployment rate for 2015, the odds for inflation and
interest rates are skewed to the upside. In our view, the terminal level of interest rate after the ongoing tightening cycle
is completed should be 6.5%. With the 2-year IBR swap rate now standing just below 4.8%, we view significant upside.
We recommend paying the 2-year IBR, with target at 6.0% (stop at 4.0%). This call is favored not only by risks of
further overheating in Colombia, but also by a steepening in the U.S. yield curve.
In Mexico, we see a neutral bias for monetary policy until yearend (i.e., interest rate stable at 3.0%), with hikes on the
pipeline only for 2015, after the kick-off in the Fed tightening. In our view, the equilibrium level of nominal interest rate in
Mexico is 6.5%. Considering the current pricing, we see reason for the yield curve to steepen further ahead.
We suggest paying the 5y1y TIIE forward swap curve, with target at 6.7% and stop at 5.3%. This forward has
been standing around 5.75%, one of the lowest levels since mid-2013. In the peak of last year’s liquidity crunch, this
rate peaked at 7.0%.
We also recommend adding steepeners in the MBono curve, being long Dec18 and short Dec15. This spread
has been around 145bps lately, and our target is 250bps (stop at 100bps).
Our calls on Mexican yield curve profit on the acceleration of the local economy and a reduction in global liquidity.
Thus, another year of disappointing GDP growth and persistently low 10-year U.S. Treasury yield would hurt our
recommendation. Another risk to our call is a possible rally in long Mexican rates as the effects of the economic reforms
start to show. But we believe the latter is already largely priced in.
3.3
3.5
3.8
4.0
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jul-12 nov-12 mar-13 jul-13 nov-13 mar-14 jul-14
Pay 2-Year IBR Swap
Fonte: Bloomberg, Itaú
IBR 2y Swap
% p.a. target: 6.0%
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In Chile, we see considerable downside risk for interest rate in the short run, due to continued signs of activity
slowdown. For the medium term, the risk is skewed to the upside, as the economy rebounds and the Fed hikes rate.
We recommend being long on the steepness of the Camara swap rate, receiving the 1-year and paying the 5-
year, with a target of 150bps and stop at 10bps (today, the spread is 50bps).
4.5
5.5
6.5
7.5
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jul-09 jul-10 jul-11 jul-12 jul-13 jul-14
Pay 5y1y TIIE Forward
Fonte: Bloomberg, Itaú
5y1y TIIE Forward
% p.a.
target: 6.7%
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
3.0
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jul-11 jul-12 jul-13 jul-14
MBono: Pay Dec18, Receive Dec15
Fonte: Bloomberg, Itaú
MBONO Dec-18 MBONO Dec-15 Spread (right)
% p.a. % p.a.
-150
-50
50
150
250
350
450
0.0
2.0
4.0
6.0
8.0
10.0
jul-08 jul-09 jul-10 jul-11 jul-12 jul-13 jul-14
Steepeners in Camara Swap Rates
Fonte: Bloomberg, Itaú
% p.a.
5y rate 1y rate Spread (right)
bps
Itaú BBA
11 HOME
On the currency space, we see room for the Chilean Peso to keep weakening, due to the possibility of more downside
surprises with the economy (and policy rate), as well as our expectation of further drops in copper prices (about 2%
until end-2014, more bearish than consensus and futures).
Since the MXN has been fairly resilient, due to the approval of economic reforms, we suggest buying the MXN and
selling the CLP, with target at 46.5 and stop at 42.0 (current level around 43.5).
The risk of interventionism on the MXN and the CLP is lower compared to other LatAm economies. And while the pair
has already yielded 22% in total returns since 2012, we still see upside (about 6% in our baseline scenario). The
balance of risks also favors this positioning. A neutral carry is another advantage.
ncy
35
37
39
41
43
45
47
49
51
53
55
jul-08 jul-09 jul-10 jul-11 jul-12 jul-13 jul-14
Mexican Peso Vs. Chilean Peso
Fonte: Bloomberg, Itaú
MXN/CLP
target: 46.5
9.5
10.5
11.5
12.5
13.5
14.5
15.5
400
450
500
550
600
650
700
jul-08 jul-10 jul-12 jul-14
Buy MXN, Sell CLP
Fonte: Bloomberg, Itaú
USD/MXN (right)USD/CLP (left)
Itaú BBA
12 HOME
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Ratings: Definitions, Dispersion and Banking Relationships
Ratings (1)
Definition (2)
Coverage (3)
Banking
Relationship (4)
Outperform The analyst expects the stock to perform better than market average.
43% 38%
Market Perform The analyst expects the stock to perform in line with market average.
40% 35%
Underperform The analyst expects the stock to perform below market average.
17% 15%
1. The ratings used herein (Outperform, Market Perform and Underperform), correspond approximately to Buy, Hold and Sell, respectively.
2. Ratings reflect the analyst’s assessment of the stock price performance in the medium term compared with market average. Recommendations will remain valid until the analyst changes the rating, which may happen as a result of news or simply due to a change in the stock price (there is no defined time horizon). Companies are grouped into industries, according to their similarities. The industries are: (i) Banking & Financial Services, (ii) Consumer Goods & Retail + Food & Beverage, (iii) Healthcare + Education, (iv) Steel & Mining + Pulp & Paper, (v) Oil, Gas & Petrochemicals + Agribusiness, (vi) Real Estate, (vii) Telecommunications, Media and Technology, (viii) Transportation, Manufacturing and Logistics, (ix) Utilities, and (x) Equity Strategy.
3. Percentage of companies covered by Itaú Corretora de Valores S.A. within this rating category.
4. Percentage of companies within this rating category, for which Itaú Unibanco S.A. or any of its affiliated companies provided investment banking services over the last 12 (twelve) months, or which may be provided during the next 3 (three) months.
Relevant Information
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Relevant Information – Analysts
Analysts Disclosure Items
1 2 3 4 5
Mauricio Oreng
Ciro Matuo
Luka Barbosa
Bruna Tomaidis
Ilan Goldfajn: Chief Economist
1. The investment analysts involved in the preparation of this report are related to an individual who works for the issuer object of this analysis report. The nature of this relationship is...
2. The investment analysts, their spouses or companions, have a direct or indirect stake, in their names, in the capital stock and/or other securities issued by the companies object of their analysis.
3. The Investment analysts, their spouses or companions, are directly or indirectly involved in the purchase, sale, disposal or trading of securities that are the object of this report.
4. The investment analysts, their spouses or companions, have a direct or indirect financial interest in the issuing company of the securities analyzed in this report.
5. The investment analysts, their spouses or companions, deal with shares of mutual funds which concentrate their investments in the analyzed company or in the company’s industry, or in which they can directly or indirectly influence their management or administration
