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LATAM: Morgan Stanley Sees Important Differentiation In LatAm Rates

LATAM
  • Morgan Stanley believes that trading the upcoming FOMC easing cycle in LatAm could be trickier than most assume. They expect local rates to grind lower once Fed cuts come through, with steepening pressures across the board, except in Brazil, but see important differentiation between countries.
  • MS sees lower front-end betas to US cuts in Brazil and Chile, given different stages of their rate cycles and weaker direct economic ties to the US. Brazil growth is also picking up notably. In contrast, MS sees higher front-end betas to US cuts in Mexico and Colombia, given stronger US ties and weaker domestic activity. Rising political risk premia in Mexico is a concern though. In terms of new trades, MS receives Jan 29 DI in Brazil and 1y IBR in Colombia, as well as 1y TIIE versus SOFR.
  • On the FX front, MS says that a more front-loaded Fed easing cycle, prompted by concerns about a US recession, would be negative for risk and could pressure LatAm currencies, despite attractive valuations. MS dislikes MXN and COP, which are most impacted by global growth concerns, but is more constructive on BRL and neutral CLP, resulting in a new long BRL/COP trade.
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