Itaú BBA - Andean FX outperformed in a delayed reaction to the Fed

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Andean FX outperformed in a delayed reaction to the Fed

March 16, 2017

Brazil registered formal job creation in February for the first time since March 2015.

With information available until 6:30pm Brasilia time

Highlights

  • In LatAm FX, currencies under our coverage were mixed. Andeans had a late reaction to Wednesday’s FOMC meeting. The FOMC guidance was deemed dovish by the market as the dots remained consistent with only 2 further hikes this year. This way, the COP outperformed the majors trading at 2,922.10/USD (+1.66%) and the CLP appreciated 1.24% to 670.53/USD. Meanwhile, the MXN depreciated 0.23% to 19.27/USD and the BRL was the regional laggard, trading at 3.1190/USD (-0.49%).
  • In rates, Brazilian yields widen partly due to LTN and NTN-F auctions and partly on some negative news on the Social Security reform. Rapporteur Arthur Maia signals he’ll deliver his report on the bill by early April. In DI Futures, very short rates inched down, and the rest of the curve went up, as the Jan-19 increased 5bps to 9.54% and the Jan-21 went up 4bps to 9.99%.

Macro Backdrop

BRAZIL
  • According to FIESP, São Paulo state industry employment rose 0.4% m/m in February.
  • February job creation delivers positive surprise. CAGED formal job creation was positive at 36k in February, better than our estimate (+15k) and market expectations (+26k). This constitutes the first month of positive job creation since March 2015 (although seasonally-adjusted, 55k formal jobs were closed). The 3-month moving average continued to improve, moving to -33k from -62k. Job closings are moderating, in line with the recent trend. This does not change our outlook of rising unemployment, as we expect positive job creation (in seasonally adjusted terms) only in the second half of the year. 
  • BCB placed the full offering of 10,000 FX swaps. After closing, the Central Bank called a roll over auction of up to 10,000 contracts on March 17. 
CHILE
  • As predicted, BCCh cut its policy rate by 25-bp to 3.0%, but this might not be the final cut in the cycle. The central bank initiated a 50-bp easing cycle with a quarter-point cut in January, thereafter strategically pausing last month. The communiqué announcing retained an easing bias, signaling that recent macroeconomic trends (low inflation and weak activity) could require additional monetary stimulus. We consider this the precursor to the central bank expanding its baseline scenario for the easing cycle. The board highlighted that inflation expectations for the relevant forecast horizon remain anchored, but are below the 3% target for the short-term. Meanwhile, the board notes activity is weak, while the labor market has shown a more significant deterioration in spite of a broadly stable unemployment rate. In spite of the seasonally strong inflation readings during 1Q17, the likelihood that inflation will languish near the floor of the 2%-4% tolerance range persists. This would occur amid a firm CLP and a widening output gap, supporting calls for additional rate cuts. By yearend, we see the policy rate at 2.5%, concluding a 100-bp easing cycle. Full Report
COLOMBIA
  • Colombia’s current account data for the 4Q16 ratifies the shrinking of external imbalances from highs reached following the terms-of-trade shock. The current account recorded a USD 2.6 billion deficit in 4Q16 (4Q15: USD 4.0 billion deficit), below our call (USD -2.2 billion) and above market consensus (USD -2.8 billion). The rolling four-quarter deficit moderated to USD 12.5 billion (4.4% of GDP), from USD 14.0 billion as of 3Q16 (5.1% of GDP) and USD 18.8 billion in 2015 (6.4% of GDP). Our own seasonal adjustment shows the current account deficit is even lower at the margin, at 3.5% of GDP (4.7% in 3Q16), recording the smallest deficit since 4Q13. As oil prices stabilize at a higher level than in previous years and domestic demand looks set to remain fragile, further narrowing of the current account deficit is likely. We expect the current-account deficit to reach 3.6% of GDP this year. The correction of the external imbalances will also contribute to a looser monetary policy, given that the current account deficit has been closely monitored by the board of the central bank. Full Report

Market Developments 

  • GLOBAL MARKETS: Equity markets posted gains and DM yields widened. In the Monetary Policy Meeting, the BoE stayed on hold, maintaining a neutral stance but with slightly hawkish changes (minutes highlighted that inflation is rising sharply and there is only mixed evidence on slowing activity). We continue to view the BoE in a “wait and see” approach while also reinforcing that there are limits to how much inflation overshooting it is willing to accept, reiterating that monetary policy is ready to respond in either direction. Brexit uncertainty will continue to prevent the BoE to take any action until negotiations effectively start. For the 5-year, EONIA rates increased 6bps to 0.08% and for the 10-year they went up 7bps to 0.68%. Global Markets Tracker
  • CURRENCIES & COMMODITIES: High-beta currencies predominantly strengthened (EMFX: 0.44%; commodity-FX: 0.43%) and oil prices were broadly stable (Brent: -0.12% to USD 51.75/bbl). In LatAm FX, currencies under our coverage were mixed. Andeans had a delayed reaction to the FOMC meeting. This way, the COP outperformed the majors trading at 2,922.10/USD (+1.66%) and the CLP appreciated 1.24% to 670.53/USD. Meanwhile, the MXN depreciated 0.23% to 19.27/USD and the BRL was the regional laggard, trading at 3.1190/USD (-0.49%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads for the 5-year tenor were mixed. Both Colombian and Chilean spreads stood flat at 71bps and 132bps, respectively. Mexican country risk inched up 1bp to 132bps. Brazil CDS decreased the most again, to 217bps (-2bps). External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Brazilian yields widen partly due to LTN and NTN-F auctions and partly on some negative news on the Social Security reform. Rapporteur Arthur Maia signals he’ll deliver his report on the bill by early April. In DI Futures, very short rates inched down, and the rest of the curve went up, as the Jan-19 increased 5bps to 9.54% and the Jan-21 went up 4bps to 9.99%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: The Mexican curve went up 4bps, on average, tracking the US Treasuries movement. In TIIE swaps, the 1-year increased 4bps to 7.17% and the 10-year also went up 4bps to 7.72%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: Andean yields had a late reaction to Wednesday’s Fed hike. In Chile, ahead of the BCCh’s Monetary Policy Meeting, rates traded marginally lower. Chile Rates Tracker In Camara swaps, the 1-year fell 1bp to 2.92% and the 5-year decreased 2bps to 3.71bps. In Colombia, IBR swaps decreased once again. The 2-year fell 10bps to 5.47% and the 10-year narrowed 8bps to 6.35%. Colombia Rates Tracker

Friday Events

  • In Brazil, industrial business confidence (CNI) for March will be released. In the previous month, confidence increased 6.7%, representing a second relevant gain at the margin. We expect the current upward trend in industrial confidence to continue ahead. 
  • In Colombia, the trade balance for the month of January will be published. We expect a trade deficit of USD 815 million, smaller than the USD 1.5 billion deficit recorded one year ago. 

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa



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