Short BRL

Lower conviction trade compared to long MXN

 Arguments supporting the trade:

Fiscal sustainability is under threat due to the insolvent pensions system. The likelihood of weak government whoever gets elected means fiscal sustainability is unlikely to get resolved any time soon.

 Weak ARS, makes Brazil less competitive. Also economic exposure to Argentina negative.

 BIS REER is in the middle of the 20-year range

 Go long USDBRL at 4.15 with small long positions in EURUSD and short USDJPY to diversify long USD exposure

Arguments against
Current account is roughly balanced
Much less Brazilian debt is held by foreigners compared to Mexico and Argentina
Positioning: GBI-EM investors are slightly underweight already

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MXN opportunity

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Political risk premium high due to election and NAFTA negotiations Factors supporting the trade: High real interest rates, good carry AMLO: buy rumour sell fact, will be constrained by institutional mechanisms, congress Central bank is independent and has credibility. Despite his belligerent rhetoric, he had reputation of fiscal responsibility as mayor of Mexico City. His proposed cabinet team seems credible. Solid growth prospects, overheating economy in the US is positive for Mexico due to export channel Current account not excessive NAFTA unlikely to change much Structural reforms over the past 5 years likely to bear fruit in the coming years Factors against the trade: AMLO may end up derailing fiscal sustainability, attack institutions Positioning: CFTC positioning showed net longs of MXN vs USD until early June Trade recommendation: Long MXN, against USD, EUR and JPY Date: 20/06/2018 Entry levels: Sell USDMXN 20.51, Sell 23.70, Stop Loss (based on USDMXN,...
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