Global growth buoys LatAm assets

Transcription

1 Global growth buoys LatAm assets LatAm Fixed Income Strategy Monthly April 25, 2017 Highlights Global growth positive momentum continues, with a synchronized pick-up in activity indicators. Barring a negative surprise in French elections, LatAm asset prices stand to benefit from the positive momentum. The recent MXN s outperformance reflects this still positive landscape and the constructive approach taken by U.S. policymakers regarding Nafta. Financial markets have priced-in a moderation of trade protectionism in North America while the intervention set up by the Mexican authorities in February managed to ease concerns of a hefty depreciation of the Peso Contents 1) Currencies p. - Brazilian Real 3 - Mexican Peso 3 - Chilean Peso 4 - Colombian Peso 4 2) Rates - Brazil Rates 5 - Non Brazil Rates 7 3) Appendix 10 and reduced upside risks for inflation this year. In this context, Banxico is finding room to reduce the pace of tightening, amid a moderation of Mexico s internal demand and the dissipation of oneoff inflationary shocks. Meanwhile, the Brazilian assets showed some resiliency to the negative domestic news flow. Despite the political noise, the fiscal reform effort in Brazil remains on track. Our calculations show the diluted Social Security reform bill could still be seen as an important step in avoiding an ever-growing trajectory of pension expenditures. STRATEGY TEAM Ciro Matuo, CNPI ciro.matuo@itaubba.com Eduardo Marza eduardo.marza@itaubba.com Please refer to page 22 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.

2 1) Currencies For a thorough macroeconomic discussion, see LatAm Macro Monthly Positive global growth momentum continues, April 13. Overview The BRL had a moderate reaction to the political news over the past weeks, partly owing to the general positive stance of foreign investors regarding Brazil. Despite the noisy domestic news flow, the fiscal reform effort remains on track. The report of the Social Security s rapporteur in the House of Representatives includes changes that reduce the total fiscal impact of the original bill. Yet, our numbers show spending on private Social Security (INSS) and BPC/LOAS would stay more or less stable as a percentage of GDP, if the minimum wage rises according to inflation. In all, even though the dilutions make compliance with the spending ceiling more challenging (particularly after 2021), the modified reform could still be seen as an important step in avoiding an explosive trajectory in Social Security expenditure. 30% 20% 10% 0% -10% -20% -30% -40% 2% 7% -1% -4% -5% -3% -4% -28% Commodity returns -19% -11% -1% -2% 23% 12% -5% 20% 19% 15% 8% 1M 3M 6M 12M CRB futures Brent oil Copper Iron ore Soybean -1% 20% 15% 10% 5% 0% -5% -10% BRL MXN CLP COP 0% Latam FX - spot retuns 16% 14% 3% 3% 2% 4% 5% 3% 3% 2% 2% 2% 2% 0% -5% 1M 3M 6M 12M Agriculture prices weakened over the last month, due to a stronger soybean crop in the U.S. and weaker sugar demand from India. We lowered our price forecasts for both commodities. However, we raised our projections for corn and wheat due to lower crops in U.S. and the higher probability of an El Niño anomaly in the Pacific from 2Q17. See our Commodities Monthly Review Falling commodity prices are not a sign of global weakness, April % 15% Deviations from model estimates BRL (-0.3 s.d.) COP (-0.3 s.d.) CLP (-1.3 s.d.) MXN (0.4 s.d.) (-) rich currency (+) cheap currency 10% 5% 0% -5% 1.9% -1.5% -1.5% -4.2% -10% Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 s.d. = standard deviation of residuals Page 2

3 Our FX models 1 suggest the MXN underwent a hefty correction over the past month. The Peso was oversold during 1Q17, but has converged towards the estimated fair value amid some easing in U.S. protectionist concerns and the newly introduced FX swaps program. Looking ahead, we see room for further correction of the MXN, amid easing of EU politics tail-risks and the positive US growth momentum. BRL (Brazilian Real) Fundamentals: We continue to forecast the BRL at 3.35/USD by YE17 and 3.45/USD by YE18. Commodity prices drop from their current levels and US interest rates increases throughout the year, even though at a very gradual pace, justify a currency depreciation from current levels. Such exchange-rate trend is in line with a scenario of slight growth in current-account deficits, albeit from low levels, not compromising external sustainability. Technicals: The BRL technical position remained neutral, even after some volatile weeks due to concerns over the Social Security reform. In fact, according to BM&F data, the aggregated net position of local and foreigner institutional investors is fairly close to zero. What s more, BCB started to rollover the FX swaps expiring in May (USD 6.4 billion). If the 16,000 contracts pace is maintained throughout the month, the entire amount of outstanding contracts will be rolled over. Positioning: After trading rich throughout March, the BRL underwent a correction. Our numbers show it is 1.5% stronger than the fair-value down from the gap of 9% estimated in our previous report. In volatility-adjusted terms, however, this deviation is not statistically significant, amounting to only 0.3 standard-deviations Technical position (USD futures) USD billion Institutional investors (nationals + foreigners) (+) long USDBRL (-) short USDBRL -15 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Source: BM&F, Itaú MXN (Mexican Peso) Fundamentals: Markets have priced-in lower expectations of an escalation of U.S. protectionism, which is reflected in the substantial appreciation of the MXN in the past month. A more constructive dialogue between U.S. and Mexican trade negotiators and the FX commission intervention played a role in the price action. We have revised our exchange rate forecast for 2017 (to 19.5/USD, from 20.5/USD) and 2018 (to 18.5/USD, from 19/USD), assuming that the uncertainty will dissipate gradually, although we acknowledge that volatility is likely to return at some point between now and the presidential elections in Mexico in June The short-term FX models are outlined in Appendix 1, together with updated estimates. Page 3

4 Technicals: The technical position reflects the better sentiment towards the Peso. According to the CFTC data on the combined positioning of futures and options, leveraged funds turned net long on the MXN in the last week of March. This is the first time such funds hold bullish positions on the Mexican Peso in almost 12 months (see graph below). Positioning: Our models suggest the MXN underwent a sharp correction over the past month. Even though the uncertainties over US-Mexico trade relations are not over, our results imply the Peso is no longer under stress mode. Indeed, using an adapted version of our FX model that includes an indicator variable for the U.S. election, we estimate the MXN is oversold in about 1.9% - down from almost 15% in early January. This represents a statistically insignificant gap of 0.4 standard deviations, thus supporting our view that Mexico s fundamentals are back on the driver s seat Leveraged funds become MXN bulls in thousand contracts (+) long MXN Net position (options (-) short MXN and futures combined) -120 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Source: CFTC, Itaú CLP (Chilean Peso) Fundamentals: The CLP performed well in recent weeks, as copper prices remain elevated. Even though foreign direct investment fell strongly across 2016, net direct investment continues to fully finance Chile s current account deficit. With the support of higher copper prices and internal demand set to remain weak, current-account deficit will likely remain at low levels in the short term - though we note that the mining strike has an adverse impact on the trade balance in the short term. Positioning: Going forward, the expected hikes from the Fed and further easing domestically will result in some weakening of the CLP. In fact, it is the only currency under our coverage presenting a meaningful deviation from its fair value. Our results imply the CLP is trading somewhat rich: it is stronger than the model estimate in about 4.2% (1.3 standard deviations). COP (Colombian Peso) Fundamentals: Colombia s current account deficit continues to narrow at the margin. Recovering global commodity prices favored the performance of exports at the end of 2016, whereas imports remained weak, reflecting the internal demand slowdown. In the full year, foreign direct investment into Colombia covered the current account gap registered in 2016, but such improvement can be explained by the one-off flow related to the privatization of a hydropower company. Looking ahead, as oil prices stabilize at a higher level than in previous years and domestic demand remains fragile, further narrowing of the current account deficit is likely. We see the COP at 3,080/USD by YE17 and 3,175/USD by YE18, as the interest rate differential with the U.S. narrows. Page 4

5 Positioning: The COP s valuation is broadly neutral: it is trading around 1.5% stronger than the fair value, but it is not statistically meaningful (0.3 standard deviations). Nevertheless, the currency s carry will likely remain attractive going forward, given that still-high underlying inflation limits the probability of an acceleration of the monetary easing (see the discussion below). 2) Rates Overview Tail-risks relating to the French presidential election have fueled volatility in risky assets. Provided the French election does not bring along a negative surprise, the outlook for Europe will brighten for the rest of the year. In fact, Europopulist support appears to have peaked and might fall ahead. In a recent study, we argued that the economic recovery, falling unemployment, and lower number of asylum applications are likely to reduce support for populist and Eurosceptic parties ahead bps French elections on the market's radar France-Germany spread (difference between 10-year yields) Correction after the first round 10 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Brazil Rates At its April monetary policy meeting, the BCB cut interest rates by 1.0p.p. reducing the Selic to 11.25%. The meeting minutes indicate the board considered a more aggressive move. We think the Copom will cut by 100bps again at the next meeting. However, renewed frustration with activity data and, to a lesser extent but also relevant, a faster fall in inflation expectations and resolution of the economic reform process in Congress might lead it to accelerate some more. We forecast the Selic rate at 8.25% by the end of 2017 and The front end currently roughly prices-in 270bps in rate cuts for 2017 (ex-term premium), falling short of the 300bps we expect. Page 5

6 11.5% 11.0% 10.5% 10.0% 9.5% 9.0% 8.5% 8.0% 7.5% Forwards vs. analysts' projections Market pricing (DI futures) Market pricing (ex-tp*) Itaú forecast Consensus forecast 7.0% % p.a. 6.5% Apr-17 Apr-18 Apr-19 Apr-20 Apr-21 * TP = Term-premium (historical) Source: Bloomberg, BCB, Itaú DI futures: implicit rate moves by Unadjusted for TP* -255 Adjusted for TP* -271 Analysts' consensus bps YE 2018YE * TP = Term-premium Source: Bloomberg, BCB, Itaú 0 The improved inflation outlook echoed in BCB s official surveys and asset prices alike. According to the latest Focus report, average inflation expectations 5 years forward are around 4.14%, suggesting economists believe the ongoing broad disinflation process tends to foment a debate about reducing Brazil s inflation target. The National Monetary Comitee (CMN) will meet in June to reassess 2018 s 4.5% target and set the target for the following year. Likewise, implied inflation is trading around historical lows, with the 4y1y forward breakeven close to 4.55%. This implies a premium over the survey-based measure of only 41bps considerably lower than the historical average of 107bps. Given that the median inflation forecasts for 2021 point to inflation at 4.00%, we changed the steady-state inflation premise in the fair value calculation. So far we have been using the current inflation target as the terminal level for inflation priced into the long end of the DI futures curve, but, since the market seems to take into account the possibility of a target reduction, we have replaced our long-term inflation assumption by the median expectation for 2021 (currently BCB collects inflation forecasts from 2017 through 2021). In addition, the fair value estimate assumes the real U.S. terminal rate is 1.0% and uses 10-year CDS spreads (presently at 310bps) as the country-risk proxy. Together with our term premium estimate, we arrive at an upper bound of 9.7%, whereas the terminal rate implied in the curve (using the Jan-21x25 forward rate as proxy) is approximately 90bps higher. These figures would indicate that some premium remains in the long end, but we stress that any fair value estimate for the nominal curve depends on the steady state inflation assumption. 8.0% 7.5% 7.0% 6.5% 6.0% 5.5% 5.0% Long breakeven vs. survey forecasts % p.a. Breakeven (NTN-Bs, 4y1y) Survey Forecast (Focus, 5y) 4.5% 4.55% avg. premium ( ) = 1.07% 4.0% 4.14% Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Source: Bloomberg, BCB, Itaú 16% 14% 12% 10% 8% 6% 4% 2% 0% Fair value for long term rates - Brazil p.a. Total: 9.68% U.S. real terminal rate CDS spread (10-year) Median expectation (Focus, 2021) Term premium Forward rate (5y5y) 1.58% 4.00% 3.10% 1.00% 10.64% Brazil Page 6

7 Non-Brazil LatAm rates: Mexico, Chile and Colombia In Chile, inflation remains below the 3% target and one-year-forward expectations are likewise strolling around 2.90%. In contrast, Colombia s underlying inflation measures were stickier than the headline, possibly owing to price inertia and lagged implementation of the VAT hike. With Colombia s activity still weak and the more stable COP, we continue to see inflation decelerating over the course of this year to 4.1% and see further disinflation to 3.5% by YE18, as the impact of VAT hike fades. Mexican inflation outlook have also become more challenging, as CPI continues to rise beyond the upper-bound around the target. In a recent research piece, we argued that Banxico is currently being more conservative than in the past, perhaps as reinsurance against the risk of further MXN depreciation Inflation expectations (1 year forward) % p.a. Mexico Chile Colombia upper bound target 2.5 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 * latest data derived from Latin Consensus Source: Latin Consensus, Banxico, Banrep, BCCh, Itaú % p.a. Inflation expectations (2 years forward) upper bound Mexico target Chile Colombia 2.5 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 * latest data derived from Latin Consensus Source: Latin Consensus, Banxico, Banrep, BCCh, Itaú 12% 11% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% % p.a. 1.7% Fair value for long rates - LatAm 7.6% 7.3% 3.0% 2.0% U.S. Real terminal rate CDS spread (10-year) Domestic inflation target Term premium Forward rates (5y5y) 1.0% 6.3% 3.0% 1.3% 4.6% 3.0% 2.2% 1.0% 1.0% 1.0% 6.9% Mexico Chile Colombia 7.9% MEXICO Amid the outperformance of the MXN and the accompanying reduction of upside risks to inflation this year, Banxico is finding room to reduce the pace of monetary policy tightening. The Central Bank hiked the reference rate by 25bps in March, marking a departure from the 50-bp tightening pace implemented from February 2016 through February The board explicitly mentioned in its statement the 25-bp rate increase of the Fed as one of the reasons for its decision to hike. Nevertheless, the board signaled it took some comfort from the behavior of the MXN and said that Page 7

8 there was no additional deterioration of the balance of risks for inflation since the previous meeting. In all, we read the guidance as consistent with our scenario of a couple more 25-bp hikes this year (after each of the Fed moves we expect). The front end of the TIIE swaps curve falls short of pricing in 45bps in rate hikes this year. 7.75% 7.25% 6.75% Forward curve pricing (TIIE swaps) vs. analysts' projections % p.a TIIE swaps: implicit rate moves by... bps % 5.75% Market pricing Market pricing (ex-tp*) Itaú forecast Consensus forecast 5.25% Apr-17 Oct-17 Apr-18 Oct-18 Apr-19 Oct-19 Apr-20 * TP = Term-premium (historical) Source: Bloomberg, Latin Consensus, Itaú Unadjusted for TP* Adjusted for TP* Analysts' consensus 2017YE YE * TP = Term-premium Source: Bloomberg, Latin Consensus, Itaú On the fiscal front, a large dividend from the Banxico will likely allow the Mexico to surpass the fiscal targets set for 2017, thus reducing the odds of a sovereign rating downgrade. The government is currently targeting a primary surplus of 0.4% of GDP, a public sector nominal deficit of 2.4% of GDP and public-sector borrowing requirements (broadest measure) of 2.9% of GDP for We now expect a narrower public sector nominal deficit in 2017 (2.1% of GDP, 2.4% previously) and lower public-debt-to-gdp ratios for both 2017 (49% of GDP, 49.5% previously) and 2018 (48.7% of GDP, 49.2% previously). Be that as it may, it s important to stress that the rating agencies are probably expecting the achievement of more ambitious fiscal results in 2017 (relative to the targets) and would react negatively if the windfall of the dividend is allocated towards further spending. CHILE BCCh cut its policy rate by 25bps to 2.75% at its April monetary policy meeting, surprising us (who expected the central bank to remain on hold). According to the central bank s surveys, 64% of economic analysts saw a pause (an option also favored by most in the Market, according to the Bloomberg consensus). Meanwhile, 59% of traders expected a rate cut. Recent inflation and activity data was deemed in line with the latest inflation report s (IPoM) forecast scenario. However, the labor market deterioration has been more severe than estimated by the central bank, which, in our view, triggered the earlier-than-expected response. In the 1Q17 IPoM, the central bank s baseline scenario expanded the easing cycle by 25-bps to 75-bps now already delivered. However, the press release announcing the decision retained an easing bias, signaling that further monetary easing on the near horizon is a possibility. Specifically, the board stated that it will evaluate the need for "some" additional monetary stimulus. Such bias is consistent with our scenario that one more rate cut will materialize. The curve fully prices-in another 25-bp cut this year, consistent with our projection for the policy rate at 2.5% by YE17. Page 8

9 4.5% 4.0% Forward curve pricing (Camara swaps) vs. analysts' projections % p.a bps Camara swaps: implicit rate moves by % % Market pricing 2.5% Market pricing (ex-tp*) Itaú forecast Consensus forecast 2.0% Apr-17 Apr-18 Apr-19 Apr-20 Apr-21 Apr-22 * TP = Term-premium (historical) Source: Bloomberg, Latin Consensus, Itaú YE -2 Unadjusted for TP* Adjusted for TP* Analysts' consensus 2018YE * TP = Term-premium Source: Bloomberg, Latin Consensus, Itaú COLOMBIA As discussed above, in contrast to the fast disinflation observed in the headline inflation, the core measures tracked by the central bank have shown only a marginal improvement. To be precise, Banrep acknowledged the faster-thanexpected disinflation, but noted the presence of indexation mechanisms and rising price stickiness could slow the convergence of inflation to 3%. We still expect a policy rate of 5.5% by the end of this year, with gradual (25-bp) cuts in coming months, but cannot rule out a move to a more aggressive strategy in coming meetings amid a disappointing evolution of internal demand. The IBR swaps curve implies a rate path consistent with our monetary policy scenario for this year and the next. The curve prices in 140bps in rate cuts for 2017 and roughly 100bps of further easing for 2018 (both figures are adjusted for the corresponding term premium, see the graphs below). 7.0% Forward curve pricing (IBR swaps) vs. analysts' projections 0 IBR swaps: implicit rate moves by % 6.0% Market pricing Market pricing (ex-tp*) Itaú forecast Consensus forecast % 5.0% % p.a. 4.5% Apr-17 Apr-18 Apr-19 Apr-20 Apr-21 Apr-22 * TP = Term-premium (historical) Source: Bloomberg, Latin Consensus, Itaú Unadjusted for TP* -197 Adjusted for TP* Analysts' consensus bps YE 2018YE * TP = Term-premium Source: Bloomberg, Latin Consensus, Itaú The long end of the Colombian curve will likely be under pressure in coming months, as the market debates the outlook for Colombian sovereign rating. The government is likely to record a larger-than-initially-expected fiscal deficit this year. Finance Minister Cárdenas presented to congress a budget addition project of roughly USD 2.6 billion, higher than the USD 2.1 billion initially proposed. This addition incorporates the proceeds of the structural tax reform and also includes an increase in financial income and dividends from state-owned companies. The announcement came along with the fiscal rule advisory committee s statement that the fiscal deficit limit for this year was increased to 3.6% of GDP (3.3% previously). We believe that, if the higher deficit target for this year is adopted, the odds of a rating downgrade increase. We note that although Fitch recently upgraded the country s outlook to stable, Standard and Poor s still has a negative outlook on Colombia s sovereign rating. Page 9

10 Appendix 1: FX models Our short-term financial models can be understood as extended-uip (uncovered interest parity), whereby we model FX trends using as regressors U.S. and local (market or benchmark) rates, the country risk premium (CDS spreads as proxy) and commodity prices (for oil, copper and/or CRB, depending on the currency). The final set of explanatory variables and the significance of the slopes will naturally change accordingly with the currency being modeled. To estimate the OLS regressions, we used a monthly sample starting in 2011, so as to capture the recent dynamics in LatAm FX. One shortcoming of our methodology is that our models do not account for (long-term) current account balance conditions, yet the outlook for the external accounts may be indirectly embedded in CDS spreads (one of the explanatory variables). These models may yield a good approximation of short-term trends, since FX tends to behave as an asset price in the short run. In the long run, however, balance-of-payment conditions prevail as an FX driver. Thus, our models are likely to lose accuracy over longer horizons FX Rate Sensitivity elasticity estimates U.S. Treasury yields (2y) Local yields (short-end) CDS spreads Commodity prices monthly data (Jul-11 to Mar-17) USDBRL USDMXN USDCOP USDCLP Source: Bloomberg Itaú USD/BRL BRL vs. projection Actual level Model projection Interval: +/- 1 std. dev. 1.8 Apr-15 Oct-15 Apr-16 Oct-16 Apr USD/MXN MXN vs. projection Actual level Model projection Interval: +/- 1 std. dev. 12 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Page 10

11 3,950 3,700 3,450 USD/COP COP vs. projection USD/CLP CLP vs. projection Actual level Model projection Interval: +/- 1 std. dev. 3, ,950 2, , ,200 1,950 Actual level Model projection Interval: +/- 1 std. dev. 1,700 Apr-15 Oct-15 Apr-16 Oct-16 Apr Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Appendix 2: CDS valuation model - Brazil Our valuation model for Brazilian 5-year credit spreads was introduced in a previous Monthly report. The variables used are: (i) GDP-weighted average of EM spreads; (ii) the steepness of the U.S. Treasuries curve (2s30s); (iii) noncommercial net long positions on the AUD normalized by open interest; (iv) the real exchange rate (normalized to have zero mean and unitary variance); (v) the ratio of the trailing 12 months internal federal government nominal interest payments divided by the 12-month average federal domestic securities debt; (vi) a numeric scale based on the qualitative rating provided by the three major rating agencies and (vii) an indicator variable of whether or not Brazil holds investment grade status by at least two agencies. The latter is used to partial out the impact of external shocks over Brazilian country-risk when it is deemed investment grade and when the country holds a high-yield status bps Model adherence to the data CDS spreads (5-year) Fitted values 10 Apr-06 Feb-08 Dec-09 Oct-11 Aug-13 Jun-15 Apr CDS model signals One standard devation -2 Component not explained by the model (Z Scores) -3 Apr-06 Feb-08 Dec-09 Oct-11 Aug-13 Jun-15 Apr-17 Page 11

12 Appendix 3: Itaú macro projections (vs. consensus) For a thorough macroeconomic discussion, see LatAm Macro Monthly Positive global growth momentum continues, April 13. MACROECONOMIC FORECASTS BRAZIL 2017F 2018F Itaú Survey Itaú Survey Real GDP growth - % CPI - % Monetary Policy Rate - eop - % BRL / USD - eop MEXICO 2017F 2018F Itaú Survey Itaú Survey Real GDP growth - % CPI - % Monetary Policy Rate - eop - % MXN / USD - eop CHILE 2017F 2018F Itaú Survey Itaú Survey Real GDP growth - % CPI - % Monetary Policy Rate - eop - % CLP / USD - eop COLOMBIA 2017F 2018F Itaú Survey Itaú Survey Real GDP growth - % CPI - % Monetary Policy Rate - eop - % COP / USD - eop 3,080 3,019 3,175 3,001 Source: Itaú, Latin Consensus Forecasts, BCB, Banxico, BCCh, Banrep, Bloomberg Page 12

13 REAL RATES NTN-B NTN-F NOMINAL RATES DI Futures Latam Fixed Income Strategy Monthly April 25, 2017 Appendix 4: LatAm rates trackers (Updated as of April 19, 2016 closing prices) Brazil Amount Outstanding Modified Duration Last Price Δ1M Δ1Q Δ1H Δ1Y Source: Bloomberg (BGN), Itaú (BRL Billions) (Years) (% a.a.) (basis points) CDI RATE Jul Oct Jan Apr Jul Oct Jan Jul Jan Jul Jan Jan Jan Jan Jan Jul Oct Jan Apr Jul Oct Jan Apr Jul Jan Jul Jan Jan Jan Jan Jan Jan May Aug May Aug May Aug May Aug Aug Aug May Aug May Aug May Page 13

14 REAL RATES UDIBONO MBONO NOMINAL RATES TIIE Swaps Latam Fixed Income Strategy Monthly April 25, 2017 Mexico Amount Outstanding Modified Duration Last Price Δ1M Δ1Q Δ1H Δ1Y (MXN Billions) (Years) (% a.a.) (basis points) TIIE Rate month month month year Source: Bloomberg (BGN), Itaú 2-year year year year year year year year year Jun Dec Jun Dec Dec Jun Jun Jun Dec Dec Mar Jun May May Nov Nov Nov Nov Nov Dec Jun Dec Jun Dec Nov Nov Nov Page 14

15 BCU BCP NOMINAL RATES BTP CAMARA Swaps Latam Fixed Income Strategy Monthly April 25, 2017 Chile Amount Outstanding Modified Duration Last Price Δ1M Δ1Q Δ1H Δ1Y (CLP Billions) (Years) (% a.a.) (basis points) Interbank Rate month month month year month Source: Bloomberg (BGN), Itaú 2-year year year year year year year year year year year Jan Mar Jan Jan Feb-21 1, Mar-21 1, Jan Jan Mar-26 3, Jan Jan Mar-35 2, Jan-43 1, Mar May Jun Jan Apr Jun Jul Feb Mar Mar May Jul Jan Mar Jul Aug Oct May Feb-21 1, Mar Sep Mar May Feb Feb Page 15

16 REAL RATES UVR COLTES NOMINAL RATES IBR Swaps Latam Fixed Income Strategy Monthly April 25, 2017 Colombia Amount Outstanding Modified Duration Last Price Δ1M Δ1Q Δ1H Δ1Y (COP Billions) (Years) (% a.a.) (basis points) IBR Rate month month month year month Source: Bloomberg (BGN), Itaú 2-year year year year year year year year year year Oct-18 9, Nov-18 10, Sep-19 13, Jul-20 19, May-22 18, Jul-24 26, Aug-26 22, Apr-28 14, Sep-30 14, Apr-19 10, Mar-21 14, Feb-23 14, May-25 6, Mar-33 8, Apr-35 3, Page 16

17 Appendix 5: Closed recommendations Trading Idea Entry Closing Price Date Price Date P&L (bps) Mexico TIIE Swaps: receive 1-year, pay 10-year (DV01-neutral) 252 bps 16-Nov bps 10-Feb bps Chile Camara Swaps: pay the 7-year 4.37% 9-Oct % 2-Feb-16 0 bps Mexico TIIE Swaps: pay the 7-year 5.80% 2-Dec % 29-Jan bps FX Buy MXN; Sell COP Oct Nov bps Brazil DI Futures: receive Jul16, pay Jan21 (DV01-neutral) 22 bps 8-Oct bps 23-Oct bps Mexico TIIE Swaps: Pay the 5-year 5.53% 14-Aug % 15-Aug bps Chile Camara Swaps: Pay the 10-year 4.58% 14-Aug % 17-set bps Colombia IBR Swaps: Receive 1-year, Pay 10-year (DV01-neutral) 165 bps 14-Aug bps 6-Aug bps FX Long MXN, Short COP Aug Aug bps Colombia IBR Swaps: pay the 5-year 5.36% 16-Mar % 6-Aug p.b. Mexico TIIE Swaps: receive 1-year, pay 10-year (DV01-neutral) Jun Jul bps FX Short BRL/CLP Jun Jul bps Brazil DI Futures: receive Jan16, pay Jan25 (DV01-neutral) Jun Jul bps FX Buy MXN; Sell COP May May bps Mexico TIIE Swaps: Pay the 10-year 6.19% 19-Jul % 13-May bps Colombia IBR Swaps: pay the 1-year 4.39% 17-Apr % 8-May bps Chile Camara Swaps: pay the 10-year 4.39% 3-May % 8-May bps Colombia IBR Swaps: receive the 10-year 5.98% 17-Apr % 5-May bps Mexico Receive the 1-year and pay the 10-year (DV01-neutral) 213 bps 17-Apr bps 30-Apr bps Brazil Long NTN-B % 2-Apr % 20-Apr-15-6 bps FX Long MXN, Short COP Apr Apr bps Brazil Receive DI Jan % 19-Mar % 6-Apr bps Mexico Long Mbono % 19-Mar % 30-Mar bps Chile Camara Swaps: receive the 10-year 4.54% 19-Mar % 26-Mar bps FX Short EURMXN Mar Mar bps Chile Camara Swaps: pay the 5-year 4.05% 9-Mar % 18-Mar bps Mexico TIIE Swaps: pay the 10-year 6.26% 16-Mar % 18-Mar bps FX Sell COP (Vs. USD) 2, Mar-15 2, Mar bps FX Buy MXN; Sell COP Mar Mar bps FX Sell CLP (Vs. USD) Feb Mar bps Mexico TIIE Swaps: pay the 5-year 5.30% 3-Mar % 11-Mar bps Colombia IBR Swaps: pay the 5-year 5.21% 9-Mar % 11-Mar bps Mexico TIIE Swaps: pay the 10-year (HEDGE to our long position in MBono 2024) 5.85% 9-Feb % 6-Mar bps Mexico Long Mbono 2024, Pay 2-year TIIE IRS 140 bps 23-Jan bps 6-Mar bps Chile Camara IRS: pay 5-year, receive 2-year 60 bps 13-Feb bps 6-Mar bps Colombia IBR Swaps: pay the 2-year 4.29% 13-Feb % 6-Mar bps Brazil Receive April 2015 DI Futures 12.20% 23-Dec % 27-Feb bps Mexico TIIE Swaps: pay the 5-year 5.17% 9-Oct % 23-Feb bps Brazil DI Futures: receive Jan17, pay Jan21 56 bps 13-Feb bps 23-Feb bps Brazil Long NTN-B % 6-Feb % 11-Feb bps Brazil DI Futures: receive Jan16, pay Jan21 60 bps 6-Feb bps 10-Feb bps Brazil Long NTN-B % 23-Dec % 5-Feb bps Colombia Receive COLTES Jun % 23-Dec % 4-Feb bps FX Buy MXNJPY Dec Jan bps Chile Camara Swaps: receive 2-year 3.05% 27-Nov % 23-Jan bps FX Sell CLP (Vs. USD) Dec Jan bps FX Sell EURMXN Dec Jan bps Brazil Receive Jan-15 DI (Futures) 11.59% 3-Dec % 2-Jan bps Mexico TIIE Swaps: pay the 10-year 6.00% 9-Oct % 18-Dec bps FX Sell COP (Vs. USD) 2, Dec-14 2, Dec bps Brazil Long NTN-F % 26-Nov % 7-Dec bps Brazil Long NTN-B % 26-Nov % 2-Dec bps FX Long MXN/COP Nov Dec bps Brazil Receive DI Jan-16, Pay DI Jan-21 (no immunization) 11 bps 19-Nov bps 21-Nov bps Chile Camara Swaps: pay the 5-year 4.13% 9-Oct % 21-Nov bps FX Sell COP (Vs. USD) 2, Oct-14 2, Oct bps FX Sell CLP (Vs. USD) Aug Oct bps Chile Camara Swaps: receive 1y, pay 5y 52bps 23-Jul bps 9-Oct bps Colombia IBR Swaps: pay 5y 5.28% 3-Sep % 9-Oct bps Mexico Mbono: long Dec15, short Dec bps 23-Jul bps 9-Oct bps Mexico TIIE Swaps: receive 2y, pay 10y 221 bps 3-Sep bps 9-Oct bps Source: Bloomberg Page 17

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