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FxWirePro: Sentiment Shifts in LatAm FX-bloc – Options Trade Updates
The broad USD had a choppy price action in the past 2 weeks, creating a difficult environment for Latam currencies even though implied vols have continued to move lower. Optimism for a China-US trade deal – as well as additional market pricing of Fed rate cuts - supported Latam currencies and local bonds. Latam FX’s rally was most likely exacerbated by investors’ light positioning, and CLP (typically a funding currency) reaped much of the benefits. Still, we believe a “soft deal” is unlikely to pull Latam FX strength much longer, particularly as the lack of growth or attractive EM yields make large capital inflows unlikely.
We, thus, maintain the neutral Latam FX position, via OW BRL and COP, and UW MXN. In outright trades, we maintain our long BRL position via option structures, and a long PEN/CLP targeting 225.
BRL: Staying long expecting inflows from the oil reserve auctions. Expected inflows from the oil reserve auctions, the Government’s privatization agenda and the SSR approval should have a positive impact in the currency. The 1st oil auction seemed to show that foreign interest may be large. An important risks continues to be local corporates preferring local-currency issuance over external: they continue to issue more in local currency, and have made additional USD-debt tenders for $2.6bn in September. This is likely the source of the weekly financial outflows recorded by the BCB. For now, we continue to recommend USDp/BRLc 1x2 option structures (K=4/4.20). Courtesy: JPM