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Banorte-Ixe FI/FX Strategy
Mexico
tual
Fixed-Income and FX Weekly
October 13, 2014
Market outlook
www.banorte.com
www.ixe.com.mx
 Brief and moderate gains after the Fed minutes. The local fixed income
market observed a flattening of the Mbonos curve, with a 6bps upwards
adjustment on short-term rates while longer maturities contracted 9bps. The peso
registered a slight appreciation of 0.2% to 13.46 per dollar
 Light agenda still focused on regional divergences. This theme should continue
as the main market driver given its potential implications for economic policy and
asset prices, which will be coupled with the assessment of how long current
trends can be sustained as doubts about valuations increase given the most recent
adjustment and warnings by the Fed about possible second round effects. In our
view, Mexican assets valuations have improved considerably and suggest that a
great part of the shift in expectations has already been discounted, limiting the
potential of further pressures in the absence of major surprises. Nevertheless, we
remain cautious on the back of persistently strong US data. This week the agenda
is light and will remain focused on this theme. Data in the US includes retail sales
and industrial production, the Empire and Philly Fed surveys and U. of Michigan
confidence. Housing starts and building permits will be evaluated in light of the
delayed and moderate growth in the sector. Fed commentary includes Yellen on
inequality on Friday, Evans, Plosser, Lockhart, Kocherlakota, and Bullard. In the
Eurozone, watch for the ZEW index, industrial production, trade balance but
mostly for September inflation. Mexican data is scarce, only highlighting the
unemployment rate
Gabriel Casillas
Chief Economist and Head of Research
[email protected]
Alejandro Padilla
Head Strategist – Fixed-Income and FX
[email protected]
Juan Carlos Alderete, CFA
FX Strategist
[email protected]
Santiago Leal Singer
Fixed-Income and FX Analyst
[email protected]
Fixed-Income
Market dynamics.…………………….pg. 2
Supply………………………………….pg. 3
Demand………………………………..pg. 4
Technicals……………………………..pg. 6
Recommendations…………………...pg. 8
Foreign exchange
Market dynamics……………………..pg. 9
Market positioning and flows……....pg. 10
Technicals…………………………...pg. 11
Recommendations………………….pg. 13
Fixed-Income
Recommendations
 Supply – This Tuesday, the MoF will auction 1-, 3-, 6- and 12-month Cetes, the
20-year Mbono (Nov’34), the 30-year Udibono (Nov’46) and 5-year Bondes D
Fixed-Income
 Demand – Foreigners’ holdings in Mbonos totaled MXN 1.281 trillion (US$ 95
billion), a market share equal to 55% as of September 30. Short positions on
Mbono Dec’24 increased for 4th consecutive week to US$0.4 billion
 Technicals –The 10-year spread closed the week with limited variations at
362bps from previous 360bps after the FOMC minutes were released
Foreign exchange
 Market cautious ahead of a relevant
week in the U.S. in terms of economic
data; yield curve likely to hold a
flattening bias
FX
 We believe directional USD/MXN
shorts are attractive, albeit cautiously
 We suggest to not add further shorts
and limit losses in case of pressures to
13.60 (3% loss from entry at 13.20)
 Weekly estimated range at 13.3013.55 pesos per dollar
 Market positioning and flows – MXN net short modestly higher on the week,
ending at US$ 281 million. Strong outflows from EM equities partially reduced
by inflows into bonds, although with total selling for a third week in a row
 Technicals – Implied volatilities picked up along all tenors, particularly from six
months forward. Main support and resistance still in USD/MXN 13.40 and 13.50,
respectively
Document for distribution among
the general public
Fixed-Income dynamics
 Mexican yield curve experiencing a flattening bias. The local yield curve
flattened last week, with a 6bps upwards adjustment on short-term rates, while
other tenors rallied 9bps. In our view, the slope could reduce an additional 1015bps, although we warn that investors will maintain on an extreme cautious tone
ahead of a higher global risk aversion environment and possible mount in volatility
Mbonos performance
Maturity date
IRS (28-day TIIE) performance
Yield to maturity
Oct/10/14
3.03
3.12
3.22
3.41
3.78
4.10
4.41
4.69
4.79
5.19
5.52
5.71
5.88
5.91
6.20
6.38
6.54
6.62
6.69
6.77
6.80
Dec'14
Jun'15
Dec'15
Jun'16
Dec'16
Jun'17
Dec'17
Jun’18
Dec'18
Jun'20
Jun'21
Jun'22
Dec'23
Dec'24
Jun'27
May'29
May'31
Nov’34*
Nov'36
Nov'38
Nov'42
Weekly change
(bps)
6
6
0
-8
-12
-7
-8
-11
-10
-10
-8
-12
-13
-13
-12
-8
-4
-5
-8
-7
-7
YTD (bps)
Maturity date
Yield to maturity
Oct/10/14
Weekly change
(bps)
YTD (bps)
-66
-58
-57
-66
-68
-68
-61
-66
-65
-59
-53
-62
-56
-51
-53
-65
-72
-46
-73
-43
-44
3-month (3x1)
6-month (6x1)
9-month (9x1)
1-year (13x1)
2-year (26x1)
3-year (39x1)
4-year (52x1)
5-year (65x1)
7-year (91x1)
10-year (130x1)
20-year (260x1)
3.29
3.32
3.37
3.47
3.96
4.47
4.85
5.20
5.74
6.20
6.91
-1
-2
-3
-4
-7
-10
-13
-14
-15
-15
-13
-50
-50
-48
-47
-31
-23
-27
-35
-49
-62
-100
Source: Bloomberg
Source: Valmer
*Issued this year in a syndicated fashion
Mbonos curve at different closing dates
Long-term reference Mbono Dec’24
%
%
8.0
8.3
11-Oct-13
7.5
7.8
7.0
7.3
6.5
6.8
6.0
10-Oct-14
5.5
6.3
3-Oct-2014
5.0
5.8
4.5
5.3
4.0
4.8
3.5
1Y
5Y
Source: Bloomberg
10Y
20Y
30
26
28
22
24
18
Years
20
14
16
10
12
6
8
2
4
0
3.0
4.3
Jan-11
Jul-11
30Y
Source: Valmer
Feb-12
Aug-12
Mar-13
Sep-13
Apr-14
Fixed-Income supply
 Banxico’s weekly auction. This Tuesday, the MoF will auction 1-, 3-, 6- and 12month zero-coupon Cetes, the 20-year Mbono (Nov’34), the 30-year Udibono
(Nov’46) and 5-year Bondes D
 We expect moderate demand this Tuesday on the back of issuance of long
duration. The market is likely to be affected by a supply effect as long-term
securities will be considered in this week’s auction. Investors will remain cautious
ahead of mounting volatility and global risk aversion. This situation could be
reflected in auction dynamics for Mbono Nov’34 and Udibono Nov’46 despite the
expectation of further flattening of the curve
Auction specifics (Monday, October 13th, 2014)
Maturity
Coupon rate, %
Auction's Calendar for 4Q14*
To be
auctioned1
Previous
yield2
Cetes
1m
15-Nov-14
--
5,500
2.86
3m
15-Jan-15
--
9,500
2.96
6m
16-Apr-15
--
11,000
3.04
12 m
17-Sep-15
--
11,000
3.09
3-Oct-19
--
3,000
0.21
23-Nov-34
7.75
3,500
6.50
8-Nov-46
4.00
UDIS 550
3.47
Bondes D
5y
Mbono
20 y
Udibono
30 y
Source: Banorte-IXE with data from Banco de México
1. Except for Udibonos, which are expressed in UDI million, everything else is expressed in
MXN million. The amount of Cetes is announced a week prior to the day of the auction.
2. Yield-to-maturity reported for Cetes, Mbonos and Udibonos
Zero-coupon
Cetes
Mbonos
Udibonos
Sep 30
Oct 7
Oct 14
Oct 21
Oct 28
Nov 4
Nov 11
Nov 18
Nov 25
Dec 2
Dec 9
Dec 16
Dec 23
Dec 30
1, 3 & 6-month
1, 3 & 6-month
1, 3, 6 & 12-month
1, 3 & 6-month
1, 3 & 6-month
1, 3 & 6-month
1, 3, 6 & 12-month
1, 3 & 6-month
1, 3 & 6-month
1, 3 & 6-month
1, 3, 6 & 12-month
1, 3 & 6-month
1, 3 & 6-month
1, 3 & 6-month
10-year (Dec’24)
5-year (Dec’18)
20-year (Nov’34)
3-year (Jun’18)
30-year (Nov’42)
5-year (Dec’18)
10-year (Dec’24)
3-year (Jun’18)
20-year (Nov’34)
5-year (Dec’18)
30-year (Nov’42)
3-year (Jun’18)
10-year (Dec’24)
5-year (Dec’18)
5-year
10-year (Dec’25)
30-year (Nov'46)
3-year (Dec’17)
5-year
4.5
YTM
5.0
Bid/cover
4.0
4.0
3.5
YTM
7.0
3.0
3.0
3.0
6.5
2.0
6.0
2.5
2.0
2.0
1.0
1.0
5.5
1.5
0.0
Source: Banxico
Apr-13
Jul-13
Oct-13
Jan-14
5-year
10-year (Dec’25)
4.0
7.5
Jan-13
5-year
5-year
10-year (Dec’25)
30-year (Nov'46)**
3-year (Dec’17)
YTM and bid-to-cover ratio
5.0
Bid/cover
Oct-12
5-year
5-year
10-year (Dec’25)
30-year (Nov'46)
3-year (Dec’17)
30-year Udibono latest auction results
YTM and bid-to-cover ratio
5.0
Jul-12
Bondes
D
Source: Ministry of Finance *The syndicated auction of stripped 30-year Udibonos will be executed the
next business day after the primary auction of Udibonos ** The syndicated auction of stripped 30-year
Udibonos will be executed the next business day after the primary auction of Udibonos
20-year Mbono latest auction results
8.0
Date
Apr-14
Jun-14
Sep-14
1.0
Aug-12
0.0
Nov-12
Source: Banxico
Feb-13
May-13
Aug-13
Nov-13
Feb-14
May-14
Aug-14
Fixed-Income demand
 Sharp reduction of foreigners’ holdings on Cetes. Their holdings in these assets
are located at MXN 589.1 billion (63.2% of the total amount outstanding) as of
September 30 from MXN 630.8 billion last week
 …and remain with a strong exposure in Mbonos. These holdings totaled MXN
1.281 trillion (US$ 95 billion), a market share equal to 55%, from MXN 1.277
trillion the previous week
 Local institutional investors heavily exposed to Udibonos. These type of
investors continue with strong holdings in inflation-linked Udibonos (around 67%
of total amount outstanding), and Bondes D (45%)
Government issuance by type of instrument
Mbonos holdings by type of investor
Total amount of US$404 billion, % of total
16%
Total amount of US$172 billion, % of total
6%
16%
17%
Zero-coupon Cetes
Banks
Bondes D
Udibonos
20%
Foreign investors
23%
Mbonos
IPAB bonds
43%
Institutional Investors
55%
Other locals
4%
Source: Banxico
Source: Banxico
Mbonos holdings by type of investor
Government bond holdings by type of investor
US$ billion unless indicated, data as of 30/09/14
Total
US$ billion and %, data as of 25/Sep/14
% of total amount outstanding
amount
Foreign
Pension
Mutual
Insurance
outstanding
investors
funds
funds
companies
Zero-coupon Cetes
73
63%
9%
5%
Floating-rate Bondes D
87
0%
6%
Real-rate Udibonos
16
11%
Fix ed-rate Mbonos
184
55%
Banks
Other
1%
2%
20%
38%
1%
12%
43%
42%
11%
14%
2%
20%
15%
5%
3%
6%
16%
DTM
30/09/14
31/12/13
Difference
Zero-coupon Cetes
63.2%
62.1%
1.1%
Floating-rate Bondes D
0.2%
0.1%
0.2%
Real-rate Udibonos
10.8%
9.8%
1.0%
Dec'14
Jun'15
Dec'15
Jun'16
Dec'16
Jun'17
Dec'17
Jun'18
Dec'18
Jun'20
Jun'21
Jun'22
Dec'23
Dec'24
Jun'27
May'29
May'31
Nov'34
Nov'36
Nov'38
Nov'42
Total
Fix ed-rate Mbonos
54.8%
56.2%
-1.4%
So urce: B anxico
Source: Banorte-Ix e w ith data from Banx ico
Foreign investors holdings of government bonds
US$ billion
30/09/14
31/12/13
Difference
Zero-coupon Cetes
43.9
44.7
-0.7
Floating-rate Bondes D
0.2
0.0
0.1
Real-rate Udibonos
1.7
1.3
0.4
Fix ed-rate Mbonos
95.5
85.2
10.3
Source: Banorte-Ix e w ith data from Banx ico
Foreign investors holdings of government bonds
Percentage of total amount outstanding
Source: Banorte-Ix e w ith data from Banx ico
Total amount
Local
Foreign
Pension and
outstanding
Banks
investors
Mutual funds
8.4
6.9
7.6
10.6
9.7
8.5
11.9
13.4
7.2
7.2
8.2
8.0
6.9
11.5
6.4
6.9
10.2
2.6
4.5
7.8
7.8
172.3
0%
2%
2%
23%
6%
8%
10%
3%
5%
10%
1%
0%
0%
1%
1%
0%
2%
0%
0%
1%
1%
4%
81%
54%
78%
30%
56%
28%
61%
54%
35%
62%
68%
87%
67%
54%
63%
56%
46%
11%
41%
43%
53%
55%
6%
15%
6%
4%
9%
4%
9%
19%
5%
4%
10%
6%
17%
32%
21%
36%
48%
85%
41%
49%
36%
19%
Other
12%
29%
13%
43%
29%
60%
21%
23%
55%
25%
22%
6%
16%
13%
15%
8%
5%
4%
17%
8%
9%
21%
Fixed-Income demand – Primary dealers
 Technical position extends deterioration as uncertainty about market
performance in October heightens. Total short positions in Mbonos are located at
MXN 57.9 billion from MXN 58.4 billion last week
 Short positions on Mbono Dec’24 increase for the 4th consecutive week. Short
positions in this instrument are located at MXN 6.5 billion (US$484 million),
higher than the MXN 4.2 billion (US$315 million) observed the previous week
Market makers' short positions on Mbono Dec'24
Market makers' short positions on Mbono Nov’42
18.0
18.0
16.0
16.0
14.0
14.0
12.0
12.0
10.0
10.0
8.0
8.0
6.0
6.0
4.0
4.0
2.0
2.0
MXN billion
0.0
Apr-10
Source: Banxico
Mar-11
Mar-12
MXN billion
Feb-13
0.0
abr-10
Source: Banxico
Feb-14
mar-11
mar-12
feb-13
feb-14
Market makers' short position on Mbonos
US$ million
Maturity Date
Total amount
outstanding as of
10-Oct-14
Dec'14
Jun'15
Dec'15
Jun'16
Dec'16
Jun'17
Dec'17
Jun’18
Dec'18
Jun'20
Jun'21
Jun'22
Dec'23
Dec'24
Jun'27
May'29
May'31
Nov’34
Nov'36
Nov'38
Nov'42
114,980
94,670
101,799
141,697
131,369
113,680
158,828
182,465
104,205
96,324
110,266
107,169
94,717
172,761
86,915
93,579
137,337
35,512
60,929
106,269
105,144
10-Oct-14
0
7,204
1,012
3,978
2,466
2,994
4,795
1,411
632
5,032
49
338
2,612
6,537
636
407
834
3,011
0
2,038
1,961
09-Oct-14
0
7,212
1,012
3,978
2,134
3,646
4,230
1,229
2,525
5,131
99
192
2,502
7,199
441
448
1,035
2,981
7
2,046
2,018
03-Oct-14
137
8,164
1,618
4,914
4,059
3,650
6,434
333
5,658
5,590
159
2,149
1,727
4,257
507
337
1,417
2,957
373
1,081
2,887
12-Sep-14
649
3,911
2,032
5,190
5,235
6,740
6,165
2,369
653
4,388
67
2,348
647
2,914
493
104
2,132
1,959
156
1,806
3,000
6-month MAX
3,526
8,363
2,553
6,838
6,265
14,600
9,434
4,215
9,243
5,953
4,341
6,143
2,612
9,060
5,611
2,726
6,000
3,945
1,246
4,296
7,784
6-month MIN
0
720
157
752
1,263
2,809
231
0
250
634
0
0
0
668
223
4
834
0
0
227
571
Fixed-Income technicals
 Short-end carry gains adjustment mainly due to variations on FX hedging
costs. Spreads between Cetes and implicit forward rates are at -10bps from +2bps
last week in the 1-month tenor and +40bps from previous +26bps in 3-month
securities
 Slight reduction in market-implied Banxico’s first hike, but still in 2Q15.
Cumulative implicit moves show an increase of 27bps in 2Q15 and 78bps by yearend
Cumulative implicit moves in Banxico’s repo rate
Basis points, using TIIE-MexDer futures
Spread between Cetes and Implicit Forward Rates
Basis Points
Tenor
Actual
Previous Previous
90
6-month
6-month
6-month
70
13-Oct-14
Week
Month
Avg
Max
Min
60
-13
2
26
-7
21
7
19
56
42
0
0
50
34
18
0
0
30
1-month
3 months
42
78
80
6 months
33
25
12
12
12 months
18
12
13
-8
Source: Banorte-Ixe with data from Valmer and Bloomberg
51
40
27
20
10
8
3
0
4Q14
1Q15
2Q15
3Q15
4Q15
Source: Banorte-Ixe with data from MexDer
 Risk premia stabilized after FOMC minutes. Following the strong adjustment
experienced in September, the spread between Mexican and US 10-year bonds
stabilized, benefited by the dovish bias on Fed’s minutes. The 10-year spread
closed the week with limited variations at 362bps from previous 360bps
 Ongoing risk aversion impacts correlation. The 3-month figure concerning the
Mbono Dec’24 and 10-year UST decreased as risk aversion remains. This week it
registered a reduction from 34% to 23%
Mbono Dec’24 and 10-year UST spread
Mexico and US 10-year bonds correlation
Basis points
3-month moving correlation
500
500
450
450
400
400
350
350
300
300
250
Jan-12
Source: Bloomberg
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
250
Jan-12
Jul-12
Jan-13
Source: Banorte-Ixe with data from Bloomberg
Jul-13
Jan-14
Jul-14
Fixed-Income technicals (continued)
 Modest relief rally after a volatile September. Local rates were able to observe
moderate gains last week albeit market conditions remain characterized by
monetary policy and geopolitical risks
 TIIE-IRS and Mbonos spreads reflecting a higher degree of uncertainty in the
market. The 2-year spread increased to 56bps from 52bps last week, whereas the
10-year one decreased to 29bps from previous 31bps
Mexican and US rates performance, last 12 months
2- and 10-year TIIE-IRS and Mbono spreads
Basis points
Mbono Dec'24
60
100
90
39
40
80
28 22
17 19 23
20
7
1
0
-10
-20
-40
Basis points
10-year UST
2
-38
-30
-37
-60
10
10-year
70
60
-1
-7
-16
-39
1
18
-24
50
-8
-15
40
-18 -21
30
20
10
-55
2-year
0
Jan-10
-80
Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct
Source: Valmer and Bloomberg
Nov-10
Sep-11
Jun-12
Apr-13
Feb-14
Source: Bloomberg
 Short-term inflationary premia remain low on the back of inflation report.
September’s inflation figure came in slightly below market expectations. As a
result, the 3-year breakeven decreased from 3.63% to 3.52%, nevertheless the 5year tenor stayed practically unchanged, moving from 3.10% to 3.09%
 Low levels along the long-term breakevens could be used to hedge inflationary
risk positions. Reduction on the inflationary premium suggests the possibility for
institutional investors to hedge inflation dynamics for coming years. In this sense,
the 10-year figure closed at 3.32% from 3.39%, while the 30-year measure moved
to 3.26% from 3.30%
3- and 5-year breakeven inflation using Mbonos & Udibonos
Implicit market inflation using Fisher Equation
10- and 30-year breakeven inflation using Mbonos & Udibonos
Implicit market inflation using Fisher Equation
5.5
4.7
5.0
4.3
4.5
5-year
10-year
4.0
3.9
Upper limit of Banxico's inflation target range
3.5
3.5
Upper limit of Banxico's
inflation target range
3.0
2.5
Nov-09
3-year
Aug-10
Apr-11
Dec-11
Source: Banorte-Ixe with data from Valmer
Aug-12
Apr-13
Dec-13
Aug-14
3.1
Nov-09
30-year
Aug-10
Apr-11
Dec-11
Source: Banorte-Ixe with data from Valmer
Aug-12
Apr-13
Dec-13
Aug-14
Fixed-Income trade recommendations

Fed’s minutes contribute to a relief rally following the strong adjustment in
September. The Fed’s minutes portrayed a dovish bias on Wednesday vis-à-vis
the interpretation given by investors to the September 17th monetary policy
communiqué and economic projections. The immediate reaction following the
minutes was positive for the markets. The FOMC has recognized that the US
economy is on an important recovery path; however, it also warned about the risks
that could become a counterweight to this growth: the dollar strength (with an
effect steering lower inflation) and global economic weakness. This situation
could be accounted as a call for investors to prepare for eventual monetary policy
normalization in the next year, but normalization likely to be gradual.
Despite the strong uncertainty regarding the Fed’s future actions, the markets still
prices in a gradual rate hike cycle begging next year. There is an important
difference between the hiking cycle path embedded in U.S. rates vs. expectations
from Fed’s officials depicted in the dot plot chart. Indeed, market discounts a more
gradual scenario. The differences between this two views account for 60bps by
2015-end, 85bps by 2016 and 120bps by 2017. Considering this situation a further
relief rally during October is expected, albeit limited. The belly of the yield curve
could be the pivot, while the shorter end could remain relatively stable after
September’s strong adjustment and the incorporated implicit rate increases,
whereas the longer end could continue flattening additional 10-15bps.
FX dynamics
 Moderate peso gain after two weeks pressured. The currency gained 0.2% to
13.46 per dollar and reached an intraday minimum of 13.28, lagging other high
beta currencies such as HUF, ZAR and PLN
 Better performance in other currencies against USD. All G10 currencies
appreciated with the exception of NOK, with JPY leading on the back of limited
suggestions about additional BoJ easing and higher geopolitical risks
Foreign Exchange market levels and historical returns
Close at
10/10/14
Emerging Markets
Brazil
USD/BRL
Chile
USD/CLP
Colombia
USD/COP
Peru
USD/PEN
Hungary
USD/HUF
Malaysia
USD/MYR
Mexico
USD/MXN
Poland
USD/PLN
Russia
USD/RUB
South Africa
USD/ZAR
Developed Markets
Canada
USD/CAD
Great Britain
GBP/USD
Japan
USD/JPY
Eurozone
EUR/USD
Norway
USD/NOK
Denmark
USD/DKK
Switzerland
USD/CHF
New Zealand NZD/USD
Sweden
USD/SEK
Australia
AUD/USD
Daily
Change
(%)1
FX performance
Against USD
Weekly Monthly
change change
(%)1
(%)1
YTD1
(%)
Weekly
YTD
0.5
0.0
MYR
2.42
592.15
2,049.19
2.90
242.31
3.26
13.46
3.32
40.37
11.13
-1.0
0.1
-0.2
0.0
-0.4
-0.4
-0.2
-0.8
-0.6
-0.6
1.5
0.9
-1.1
-0.1
2.2
0.0
0.2
0.8
-1.1
1.9
-5.5
-0.3
-3.7
-1.7
0.6
-1.7
-2.0
-2.2
-7.5
-1.8
-2.5
-11.3
-5.8
-3.6
-10.8
0.5
-3.2
-9.0
-18.6
-5.7
1.12
1.61
107.70
1.26
6.52
5.90
0.96
0.78
7.24
0.87
-0.2
-0.4
0.1
-0.6
-0.7
-0.6
-0.4
-0.8
-0.2
-1.1
0.3
0.5
1.9
0.8
0.1
0.8
1.0
0.5
0.6
0.1
-2.5
-0.9
-0.8
-2.3
-2.7
-2.3
-2.2
-5.1
-1.9
-5.2
-5.3
-3.0
-2.2
-8.2
-6.9
-8.0
-6.8
-5.0
-11.1
-2.6
-2.5
BRL
0.2
-3.6
PEN
ZAR
-5.7
COP
-5.8
-0.1
1.9
-1.1
-9.0
PLN
0.8
-10.8
HUF
2.2
-11.3
CLP
0.9
-18.6
RUB
-1.1
-2.3
JPY
1. Positive (negative) changes mean appreciation (depreciation) of the corresponding
currency against the USD.
Source: Bloomberg
AUD
0.1
-3.0
GBP
0.5
-4.9
NZD
0.5
-5.3
CAD
CHF
-6.8
NOK
-6.9
DKK
-8.0
EUR
-8.2
0.3
1.0
0.1
0.8
0.8
-11.1
SEK
-20
-15
0.6
-10
-5
0
5
10
15
USD/MXN – intraday
Last 12 months
Last 30 trading days
13.60
13.5
13.50
13.40
13.2
YTD intraday max= 13.61
Psychologic / Up Boll Band= 13.50 /13.51
Fibonacci and Support / MA 10= 13.40 / 13.43
Max Ago 14= 13.34
Psychologic= 13.30
Supports / Fibonacci= 13.26 / 13.27 / 13.28
13.30
MA 50 13.23
Fibonacci= 13.18
MA 200= 13.12
13.20
12.9
13.10
Source: Bloomberg
1.9
-2.6
Source: Bloomberg
USD/MXN
12.6
Oct-13
1.5
-3.1
MXN
Jan-14
Apr-14
Jul-14
Oct-14
13.00
7-Sep-2014
MA 150 and Fibonacci= 13.08
30D Low= 13.03
12-Sep-2014
18-Sep-2014
Source: Bloomberg, Banorte-Ixe
25-Sep-2014
1-Oct-2014
8-Oct-2014
20
FX positioning and flows
 MXN net shorts increase modestly. The net position was broadly unchanged after
going from –US$ 272 to 281 million on the week
 New historical high for USD longs. Global USD positions increased by US$ 3.8
billion and ended at +US$ 41.3 billion a new high since June 2012, when S&P cut
the US rating to AA+. The currencies most sold were AUD (-US$ 1.8 billion) and
EUR (-US$ 1.4 billion), with the latter once again very near its YTD minimum
reached at the beginning of September
 Divergence between EM bond and equity flows. Mutual fund selling in EM
stood at US$ 376 million on the week ended October 8, its third consecutive week
falling from –US$ 404 million. It is worth highlighting that this was a result of US$
1.4 billion in equity outflows, the highest since mid-March and reverting previous
gains, especially in Asia. In contrast, US$ 718 million of bonds were bought, with
Latam stronger than other regions. This divergence was also clear in Mexico, with
a net inlow of barely US$ 7 million on the week
IMM positioning in USD/MXN futures
IMM positioning by currency*
Negative = net long in MXN
2.0
1.0
13.6
Billion dollars
17
Net positions (USD bn)
13.4
0.0
13.2
-1.0
2
12.8
-3
-3.0
12.6
-4.0
7-Oct-14
7
13.0
-2.0
30-Sep-14
12
0.2
-2.4
-8
-13
12.4
-5.0
12.2
-6.0
USD/MXN
-7.0
Jul-13
12.0
Nov-13
Mar-14
Jul-14
-13.4
-18
-23
-28
-23.2
EUR
JPY
AUD
CHF
CAD
Source: CME, Banorte-Ixe
* Positive: Net long in the corresponding currency
Source: CME, Banorte-Ixe
Foreign portfolio flows into Mexico
Foreign portfolio flows by region*
Accumulated during the last 12M, million dollars
MXN
NZD
GBP
Weekly, million dollars
3,500
Oct-08-14
1,500
Equity
2,500
1,000
1,500
Oct-01-14
-35
ME and Africa
51
500
35
EM Europe
500
-62
0
-755
-500
-500
-1,500
-2,500
0.0
-0.3
-0.7
-1.5
EM Asia
430
-1,000
Fixed Income
-3,500
oct-13
Source: EPFR Global, Banorte-Ixe
30
Latam
-255
-1,500
ene-14
abr-14
-1,000
-800
-600
* Including only mutual funds’ investments
Source: EPFR Global, Banorte-Ixe
-400
-200
0
200
400
600
FX technicals
 The peso tried briefly to break the 13.40 support, closing above by Friday.
USD/MXN reached an intraday minimum of 13.27 per dollar after the Fed minutes,
reverting back above it on the last two trading days to 13.46 per dollar
 Correlations broadly unchanged and slightly up. The renewed concern over
growth divergences and its risks for the global economy (particularly for the US, as
seen in the minutes) retained its force as an important market catalyst. Dollar
strength has impacted EM and DM broadly equally, which has increased the
correlation between assets and currencies. As markets remain focused on these
issues we expect correlations to stay elevated, more so considering that the peso
could have lost its defensive bias as expectations have greatly diminished about a
potential credit rating upgrade to Mexico in the short term
 Vols higher along most tenors. The vol curve crept higher by 32bps on average,
with longer tenors adjusting to a greater degree and still showing a significant risk
premium to shorter maturities. The one month measure was up by 24bps to 8.2%,
while the three month increased by 23bps to 8.7% It is worth noting that longer
maturities stayed higher, which we believe is a result of increased uncertainty about
the Fed (and the peso) at the turn of the year. In our view, strong US data should
keep pressuring volatility higher and could affect the currency
USD/MXN – Moving averages
USD/MXN – Fibonacci retracement
Last 120 trading days
Last 12 months
13.7
USD/MXN= 13.4478 MA (50)= 13.2296 MA (100)= 13.1056 MA (150)= 13.0851 MA (200)= 13.1281
.
13.6
.
.
.
.
13.6
13.6063
13.5
13.4038
13.4
13.4
13.2785
13.3
13.1772
13.2
13.2
13.0759
13.1
13.0
12.9500
13.0
12.8
12.9
12.8
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
12.6
Oct-13
12.7481
Dec-13
Feb-14
Apr-14
Jun-14
Aug-14
Source: Bloomberg
Source: Bloomberg
USD/MXN – 1-month correlation with other currencies*
USD/MXN – 1-month correlation with other assets*
Based on daily percentage changes
1.0
EUR
CAD
ZAR
BRL
Based on daily percentage changes
HUF
RUB
0.9
VIX
SPX
May-14
Jun-14
Gold
GSCI
0.7
0.8
0.5
0.6
0.3
0.4
0.1
0.2
0.0
-0.1
-0.2
-0.3
-0.4
3-Jul-14
18-Jul-14
2-Aug-14
17-Aug-14
1-Sep-14
* Positive: appreciation of MXN and corresponding currency
Source: Bloomberg, Banorte-Ixe
16-Sep-14
1-Oct-14
-0.5
Mar-14
Apr-14
Jul-14
Aug-14
* Positive: appreciation of MXN and corresponding asset except VIX
Source: Bloomberg, Banorte-Ixe
Sep-14
Oct-14
FX technicals (continued)
 Risk reversals stabilize. Short term risk reversals decreased after nearing YTD
highs in recent weeks, with the one-month measure ending at 1.89 (-0.17 vols) and
the three-month at 2.52 (-0.21 vols). When the former is adjusted for overall
volatility it pushed back to 0.23, 1.4σ above of its one-year average and which
keeps suggesting higher conviction about dollar strength in the near future
USD/MXN – ATM options volatility curve
USD/MXN – 1M implied and historical volatility
%
11.0
Today
1 week
%
20
3 weeks
2 weeks
10.5
18
Implied
Historical
10.0
16
9.5
9.0
14
8.5
12
8.0
10
7.5
8
7.0
6
6.5
6.0
1M
2M
3M
6M
9M
4
Jul-13
1Y
Nov-13
Mar-14
Jul-14
Source: Bloomberg
Source: Bloomberg
USD/MXN – Spread between implicit and historical volatility
Emerging markets 1-month ATM options volatility
Bps
500
400
Against USD, in standard deviations relative to last year’s average
1M
3M
BRL
4.95
RUB
300
1.56
KRW
200
COP
100
MYR
1.54
1.38
0.24
PLN
0
0.15
CLP
-100
0.04
TRY
-200
HUF
-300
MXN
-0.17
-0.19
Cheap
ZAR
-400
Jul-13
Oct-13
Jan-14
Apr-14
Jul-14
Expensive
-0.24
-1.02
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
Source: Bloomberg
Source: Bloomberg, Banorte-Ixe
USD/MXN – 1-month and 3-month 25D risk reversals
USD/MXN – 1-month 25D volatility-adjusted risk reversal
Last 24 months, difference between USD calls and puts, in vols
5.0
4.5
4.0
5.0
Last 12 months, ratio adjusted against one month implied volatility
0.28
1M
3M
0.26
4.0
Risk Reversal
1Y average
+1 st. dev.
-1 st. dev.
0.24
3.5
USDMXN call > USDMXN put
0.22
3.0
0.20
2.5
0.18
2.0
0.16
1.5
1.0
0.14
0.5
0.12
0.0
Oct-12
Feb-13
Source: Bloomberg
Jun-13
Oct-13
Feb-14
Jun-14
Oct-14
0.10
Oct-13
Jan-14
Source: Bloomberg, Banorte-Ixe
Apr-14
Jul-14
Oct-14
FX trade recommendations
 Keep a USD/MXN short bias without adding further positions. We expect a
13.30-13.55 weekly range. We still believe that some investors could be enticed by
value considerations to add tactical shorts around 13.50 per dollar, which could
continue as a relevant technical resistance before the 13.61 high of the year. In this
sense, our short term model’s signals that the USD/MXN has overshoot, so we
maintain our recommendation to avoid adding to these positions but to wait in a bid
to limit recent losses (we have suggested this bias from 13.20 per dollar), albeit
modestly. Moreover, market technicals have improved further as signaled by the
fall in MXN longs in futures, higher risk reversals, volatilities and forward points.
Nevertheless, nervousness among investors remain high, as suggested by the swift
reversion of gains after the Fed minutes, with fundamentals still pointing to the
possibility of even higher volatility in the short term. Locally, Fitch’s recent
comments that eliminated the possibility of a short term upgrade of Mexico’s rating
amid high geopolitical tensions (Hong Kong, Ukraine, Syria), which could weigh
on the peso. As a result of these factors, markets have become even more nervous
about a sooner than expected hike by the Fed even if not fully reflected in the level
of US Treasury rates due to safe-have bids
EM trade-weighted REER
USD/MXN valuation according to short term financial model*
% deviation from 10Y MA
%
undervalued
MYR
THB
IDR
PEN
BRL
KRW
HKD
HRK
RUB
MXN
PLN
COP
HUF
INR
CLP
ARS
ZAR
6
overvalued
13.6
4
9.3
9.2
5.3
5.1
3.5
3.3
3.1
3.0
2
MXN undervalued
-2
0.5
-2.9
-4.5
-5.8
-6.8
-7.4
-4
-6
-11.5
-17.3
-30
-20
MXN overvalued
0
-10
0
10
20
-8
Dec-10
30
May-11
Oct-11
Mar-12
Aug-12
Jan-13
Jun-13
Nov-13
Apr-14
Sep-14
Source: Banorte-Ixe
* 2Y rolling regression against S&P500, 1Y swap spread between Mexico and the US, 1M implied
Vol, 3Y breakeven inflation, 10-year UST and 10Y TIIE-IRS and Mbono spread
Source: Banorte-Ixe
USD/MXN three-month and one-year forward points
Economic surprise indexes by region
Pips
1,200
3M (LHS)
Pts
5,000
1Y (RHS)
1,150
1,100
4,500
80
4,000
30
US
Eurozone
Asia Pacific
1,050
1,000
950
900
3,500
-20
850
800
750
700
Jan-13
3,000
Banxico's
50bps cut
25bps
cut
Jul-13
Source: Bloomberg, Banorte-Ixe
25bps
cut
Jan-14
50bps
cut
-70
2,500
Jul-14
-120
Oct-12
Jan-13
Apr-13
Jul-13
Source: Citi, Bloomberg, Banorte-Ixe
Oct-13
Jan-14
Apr-14
Jul-14
Weekly economic calendar
For the week ending October 17, 2014
Fri17
Thu16
Wed 15
Tue 14
Mon 13
Sun 12
Time
(EST)
Event
01:00
CH
01:00
CH
01:00
CH
Trade balance
Period
Unit
Banorte-Ixe
Survey
Previous
Sep (P)
USDbn
--
41.1
49.8
Exports
Sep (P)
%y/y
--
12.0
9.4
Imports
Sep (P)
%y/y
--
-2.0
-2.4
Sep
%y/y
1.4
1.4
1.5
6.9
US
Bond Markets closed for Columbus Day
08:30
EZ
Euro-area finance ministers meet in Luxembourg
11:30
US
Fed's Evans speaks in Indianapolis
02:00
EZ
Finance Ministers meet in Luxembourg
04:30
UK
Consumer prices
05:00
GER
ZEW Survey (economic sentiment)
Oct
index
1.5
0.0
05:00
EZ
Industrial Production
Aug
%m/m
-1.8
-1.6
1.0
10:00
MEX
International reserves
Oct 10
US$bn
--
--
190.5
12:30
MEX
Government bond auction -1M, 3M and 6M Cetes, 20-year Mbono, 30-year Udibonos and Bondes D
21:00
SK
Monetary policy decision (Central bank of South Korea)
--
2.00
2.25
21:30
CH
02:00
GER
04:30
UK
Unemployment rate
08:00
BZ
Retail sales*
08:00
BZ
08:30
US
08:30
US
Retail sale ex autos
08:30
US
08:30
US
08:30
US
10:00
US
Business Inventories
14:00
US
Beige Book
05:00
EZ
Consumer prices
05:00
EZ
05:00
EZ
07:30
BZ
07:30
Oct 15
%
Consumer prices
Sep
%y/y
--
1.7
2.0
Consumer prices
Sep (F)
%y/y
0.8
0.8
0.8
Aug
%
6.1
6.1
6.2
Aug
%m/m
--
0.7
-1.1
Retail sales
Aug
%y/y
--
-1.4
-0.9
Advance retail sales
Sep
%m/m
-0.2
-0.1
0.6
Sep
%m/m
0.3
0.2
0.3
Empire Manufacturing
Oct
index
21.5
20.9
27.5
Producer prices
Sep
%m/m
--
0.1
0.0
Sep
%m/m
-
0.1
0.1
Aug
%m/m
--
0.4
0.4
Sep (F)
%y/y
0.3
0.3
0.3
Sep (F)
%y/y
0.7
0.7
0.7
Govt Debt/GDP Ratio
Jul 5
%GDP
--
--
92.6
Economic activity*
Aug
%m/m
--
0.2
-1.5
BZ
Economic activity
Aug
%y/y
--
-1.0
-0.2
08:00
US
Fed's Plosser speaks in Pennsylvania
08:30
US
Initial Jobless Claims
Oct 11
thousands
--
290
287
09:00
US
Fed's Lockhart speaks in Rutgers
09:15
US
Industrial production
Sep
%m/m
0.3
0.4
-0.1
09:15
US
Manufacturing
Sep
%m/m
0.2
0.3
-0.4
10:00
US
Philadelphia Fed
Oct
index
20.8
20.0
22.5
10:00
US
Fed's Kocherlakota speaks in Montana
17:00
CL
Monetary policy decision (BCCh)
Oct 16
%
--
3.00
3.25
08:30
US
Housing starts
Sep
thousands
--
1,005
956
08:30
US
Building permits
Sep
thousands
--
1,030
1,003
08:30
US
Fed's Yellen speaks in Boston
09:00
MEX
09:55
US
Ex. food & energy prod
Core
Unemployment rate
U. of Michigan Confidence
Sep
%
5.2
5.2
5.2
Oct (P)
index
84.3
84.1
84.6
Source: Bloomberg and Banorte-Ixe. (P) preliminary; (R) revised; (F) final; (v) FOMC voting member; (nv) FOMC non-voting member. * Seasonally-adjusted data
For the week ending October 10, 2014
Fri 10
Thu 9
Wed 8
Tue 7
Mon 6
Sun 5
Time
(EST)
Event
BZ
Period
Unit
Actual
Survey
Previous
Presidential Election (1st round)
02:00
GER
Factory Orders
Aug
%m/m
-5.7
-2.5
6.6
02:00
GER
Industrial Production
Aug
%m/m
-4.0
-1.5
1.9
04:30
UK
Industrial production*
Aug
%m/m
0.0
0.0
0.5
10:00
MEX
International reserves
Oct 3
US$bn
190.4
--
190.7
12:30
MEX
Government bond auction -1M, 3M and 6M Cetes, 5-year Mbono, 10-year Udibonos and Udibonos
13:00
US
3-year Treasury Bond auction
13:20
EUA
Fed's Kocherlakota speaks South Dakota
15:00
EUA
Fed's Dudley speaks in New York
15:30
MEX
Survey of expectations (Banamex)
21:45
CH
Services PMI (HSBC)
Sep
index
53.5
--
54.1
JN
Monetary policy decision (BoJ)
Oct 7
%
0.1
0.1
0.1
08:00
BZ
Consumer prices
Sep
%m/m
0.57
0.47
0.25
08:00
BZ
Consumer prices
Sep
%y/y
6.75
6.64
6.51
08:30
US
Fed´s Evans, speaks in Wisconsin
09:00
MEX
Jul
%y/y
3.1
3.5
2.2
13:00
US
10-year Treasury Bond auction
14:00
US
Fed Minutes from 16-17 FOMC meeting
07:00
UK
Monetary policy decision (BoE)
Oct 9
%
0.5
0.5
0.5
08:30
US
Initial Jobless Claims
Oct 4
thousands
287
294
287
09:00
MEX
Consumer prices
Sep
%m/m
0.44
0.47
0.36
09:00
MEX
Sep
%m/m
0.29
0.31
0.21
09:00
MEX
Sep
%y/y
4.22
4.25
4.15
13:00
US
30-year Treasury Bond auction
13:15
US
Fed´s Lacker speaks in North Carolina
13:30
US
Fed´s Fischer,speaks in Washington
15:40
EUA
Fed's Williams speaks in Las Vegas
19:00
PE
Monetary policy decision (BCRP)
Oct
%
3.50
3.50
3.50
19:50
JN
BOJ minutes
Sep
%
4.2
--
4.5
Gross fixed investment
Core
Consumer prices
MEX
Wage negotiations
09:00
EUA
Fed's Plosser speaks in New York
09:00
MEX
Industrial production
Aug
%y/y
1.4
2.4
2.1
09:00
MEX
Industrial production*
Aug
%m/m
0.4
0.3
0.3
2014 IMF Annual meeting begins
Source: Bloomberg and Banorte-Ixe. (P) preliminary; (R) revised; (F) final; (v) FOMC voting member; (nv) FOMC non-voting member. * Seasonally-adjusted data
Track of the latest fixed-income trade recommendations
Trade idea
Entry
Target
Stop-loss
Closed
Status
P/L
Initial date
End date
Long Udibono Dec'17
0.66%
Relative-value trade, long Mbonos 5-to-10-year
0.45%
0.82%
0.82%
Closed
Closed
Loss
Profit
4-Jul-14
5-May-14
26-Sep-14
26-Sep-14
Receive 2-year TIIE-IRS (26x1)
Receive 1-year TIIE-IRS (13x1)
Long Udibono Jun'16
Long Mbono Jun'16
3.75%
4.04%
0.70%
4.47%
3.55%
3.85%
0.45%
3.90%
3.90%
4.20%
0.90%
4.67%
3.90%
3.85%
0.90%
4.06%
Closed
Closed
Closed
Closed
Loss
Profit
Loss
Profit
11-Jul-14
6-Feb-14
6-Jan-14
7-Jun-13
10-Sep-14
10-Apr-14
4-Feb-14
21-Nov-13
Receive 6-month TIIE-IRS (6x1)
Receive 1-year TIIE-IRS (13x1)
Long Udibono Dec'17
Receive 9-month TIIE-IRS (9x1)
3.83%
3.85%
1.13%
4.50%
3.65%
3.55%
0.95%
4.32%
4.00%
4.00%
1.28%
4.65%
3.81%
3.85%
1.35%
4.31%
Closed
Closed
Closed
Closed
Profit
Flat
Loss
Profit
10-Oct-13
10-Oct-13
9-Aug-13
21-Jun-13
25-Oct-13
25-Oct-13
10-Sep-13
12-Jul-13
Spread TIIE-Libor (10-year)
Receive 1-year TIIE-IRS (13x1)
Long Udibono Jun'22
390bps
4.22%
1.40%
365bps
4.00%
1.20%
410bps
4.30%
1.55%
412bps
4.30%
0.97%
Closed
Closed
Closed
Loss
Loss
Profit
7-Jun-13
19-Apr-13
15-Mar-13
11-Jun-13
31-May-13
3-May-13
Receive 1-year TIIE-IRS (13x1)
Long Mbono Nov'42
Long Udibono Dec'13
Receive 1-year TIIE-IRS (13x1)
4.60%
6.22%
1.21%
4.87%
4.45%
5.97%
0.80%
4.70%
4.70%
6.40%
1.40%
5.00%
4.45%
5.89%
1.40%
4.69%
Closed
Closed
Closed
Closed
Profit
Profit
Loss
Profit
1-Feb-13
1-Feb-13
1-Feb-13
11-Jan-13
7-Mar-13
7-Mar-13
15-Apr-13
24-Jan-13
Receive TIIE Pay Mbono (10-year)
Spread TIIE-Libor (10-year)
Long Udibono Dec'12
46bps
410bps
+0.97%
35bps
385bps
-1.50%
54bps
430bps
+1.20%
54bps
342bps
-6.50%
Closed
Closed
Closed
Loss
Profit
Profit
19-Oct-12
21-Sep-13
1-May-12
8-Mar-13
8-Mar-13
27-Nov-12
Long Udibono Dec'13
+1.06%
0.90%
+1.35%
0.90%
Closed
Profit
1-May-12
14-Dec-12
Track record of the latest FX trade recommendations (12 months)
Trade Idea
Entry
Target
Stop-loss
Closed
Status
P/L*
Initial Date
End date
USD/MXN call spread**
12.99
13.30
n.a.
13.02
Closed
Loss
06-May-14
13-Jun-14
Directional short USD/MXN
13.00
12.70
13.25
13.28
Closed
Loss
31-Oct-13
08-Nov-13
Limit short USD/MXN
13.25
12.90
13.46
--
Cancelled
--
11-Oct-13
17-Oct-13
Speculative short USD/MXN
12.70
12.50
13.00
13.00
Closed
Loss
26-Jul-13
21-Aug-13
Short EUR/MXN
16.05
15.70
16.40
15.69
Closed
Profit
29-Apr-13
09-May-13
Long USD/MXN
12.60
12.90
12.40
12.40
Closed
Loss
11-Mar-13
13-Mar-13
Long USD/MXN
12.60
12.90
12.40
12.85
Closed
Profit
11-Jan-13
27-Feb-13
Tactical limit short USD/MXN
12.90
12.75
13.05
--
Cancelled
--
10-Dec-12
17-Dec-12
* Total return doesn't consider carry gains/losses
** Low strike (long call) at 13.00, high strike (short call) at 13.30 for a premium of 0.718% of notional amount
Source: Banorte-Ixe
Disclaimer
The information contained in this document is illustrative and informative so it should not be considered as an
advice and/or recommendation of any kind. BANORTE is not part of any party or political trend.
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