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Barclays Turn More Cautious On EM Receivers, But Still Like Mexico And Colombia

LATAM
  • Barclays turn more cautious on the EM receiver as they believe the last mile of disinflation will be harder and margins of safety are smaller. Front-ends are pricing meaningful cycles and Barclays think that central banks can deliver on this as the Fed turns more dovish. However, they believe that pricing more in a world where the US could deliver a shallow cycle requires additional triggers.
  • In their view, the exceptions are countries where cycles are starting or accelerating, due to high real rates or where growth is slowing. In LatAm, this includes Mexico and Colombia, with Banxico set to deliver a first cut next week and BanRep expected to step up the pace of easing. As such, Barclays still like to receive 2y2y TIIE and are long COLTES 33s.
  • On the FX front, they think the low vol world is still supportive for high carry currencies. They prefer to fund out of EUR and still like being short EURMXN, as real rates are quite high and Banxico will likely take a cautious approach to easing. They also expect BRL to outperform, as fundamentals point to a stronger fair value, fiscal risks are subdued and the BCB maintains a gradualist easing approach.
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