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The escalation in trade tensions has put Latin America FX (and EM markets more broadly) under some pressure. This warrants some reduction in risk, and we, therefore, trim the size of our OWs in BRL, COP, and CLP in the JP Morgan's GBI-EM Model Portfolio while maintaining the MXN hedge. We hold onto a long ARS NDF as well as a USDc/MXNp 3m option with RKO=20.20.
It is advisable to maintain an over-weighted portfolio in Latin American FX-segment, as it is reckoned that given current levels and cheaper valuations, currencies may see some support despite heightened trade tensions. Reform optimism should support BRL ahead, with the base text of the SSR approved in the second round last night in the Lower House by 370 votes. COP is also trading cheap in our valuation models, while CLP could gain from local investors increasing longs and extended long USD positions from foreign investors. Meanwhile, our MXN hedge has partially offset the move weaker in this recent sell-off and we stay UW the peso.
We revise BRL, CLP, COP and PEN forecast weaker. The threat of additional tariffs this year and a weaker CNY should put additional pressures on Latam currencies.
Trade tips: We revise BRL to 4.0/USD for end-2019 (from 3.9), CLP to 730/USD (from 720), COP to 3,400/USD (from 3,300) and PEN to 3.38/USD from (3.37). CLP should still remain mildly supported by local pension funds further FX hedging their international investments (by going long CLP NDFs), and COP from BanRep’s relatively hawkish stance in the region. Courtesy: JPM