LatAm Weekly – May 3

Short MXN – Long BRL Buy 3m USDMXN at 19.24 and sell 3m USDBRL at 3.96. The spot cross reference is 4.819 and our target is 5.20, which is good for a 7.9% move in the next three months. The growth outlook in Mexico is looking progressively worse. We now expect the economy to grow by just 0.8% YoY in 2019. Our previous forecast was 1.5% YoY. We built a simple index to model long-MXN positioning where we measure the positioning of risk takers (non-commercial and non-reportable) as a proportion of the total long MXN positions. The index has been between 0.60 and 0.70 for weeks. This reflects that risk takers, in the Chicago futures market, hold most of the long MXN positions. Additionally, the USMCA approval process could present risks in the coming months. Despite the Mexican congressional approval, on Monday, a labor-reform consistent with the demands from the US congress; Democratic House Speaker Nancy Pelosi seeks to re-open the USMCA to address enforceability issues. Despite a contentious relationship between President Bolsonaro and congress, the pension reform is moving through the approval process after gaining the thumbs up from the constitutional committee. I n Brazil, the government has sent a proposal to congress titled “Economic Freedom” seeking to force the government in the future to provide economic analysis before implementing any economic program and to promote entrepreneurship through reducing bureaucracy on small businesses. Since taking the helm, the Bolsonaro led government has been vocal about its desire to privatize. The government, at its three levels, has equity in 418 companies. The combined value of actual privatization is around US$200bn according to estimates by local consultants. The USDBRL has moved to the upper bound of the 3.65 - 4.00 trading range that it has held since October of 2018. A s long as the probability of approval of the Pension reform remains high, we believe the USDBRL will not trade above 4.0. Argentina – Trying to keep the FX Under Control On April 29th, the central bank of Argentina (BCRA) on its Monetary Policy decision committee (COPOM) decided to once again tweak its FX framework. The most recent change is fixing the FX bands between 51.448 and 39.755 as opposed to th e 2% monthly depreciation of the band. Also, if the USDARS trades above 51.448, the BCRA will sell US$250mn instead of selling US$150mn. And most importantly, the BCRA could now intervene within the band. The IMF has supported all of these changes. The IMF supporting such use the funds that it transferred to Argentina has caused some controversy, given that the political noise could effectively cause the evaporation of reserves with no clear sign of medium term improvement in the country.