Liquid Insight:LatAm FX – no retreat, no surrender

By Claudio Irigoyen and Ezequiel AguirreBen Bernanke vowed again to keep monetary policy loose as long as there issignificant slack in the labor market or inflation fails to converge to the 2%target, bringing more stability to the interest-rate market.

    In this environment, we expect the Mexican peso and the Brazilian real tooutperform given solid economic fundamentals in the former, and high interestrates and oversold levels in the latter (Chart of the Day).

    We recommend short EUR/MXN via 3m RKO put options, short EUR/BRL via 3mput spreads and long BRL/CLP via 12m outright forwards.

    Buy MXN and BRL on stable global rate outlookIn testimony to Congress on Wednesday, Chairman Bernanke reiterated that theFed will support a weak economy for the foreseeable future. Interest ratesdeclined another 5bp to 2.49% and are now 26bp lower than recent highs. Weexpect US rates to trade within a range centered at current levels in the next fewmonths, supporting carry trades in emerging markets, to some extent.

    We recommend taking advantage of this environment by buying the Mexican pesoand the Brazilian real. We fund these positions in euros rather than dollars sincewe expect growth differentials to widen further in favor of the US. Further, theEuropean Central Bank still has tools at its disposal to decouple Eurozone ratesfrom the US monetary stance and we expect monetary policy in Europe to remainlooser for a longer period than in the US.