Itaú BBA - Back from the holiday, Brazilian rates rally

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Back from the holiday, Brazilian rates rally

June 16, 2017

The DI futures curve bull flattened (Jan18x21: -10bps).

With information available until 6:30pm Brasilia time

Highlights

  • The DI futures curve bull flattened (Jan18x21: -10bps). In an interview with Broadcast on Thursday, Governor Goldfajn affirmed the disinflation process and the accompanying reduction of interest rates is a “given”, but the pace of rate cuts is conditional. Namely, he stated the discussion revolves around the pace and extension of the easing cycle; these will depend on the evolution of both the reforms and adjustments as well as on the inflation and activity. He added the “decision will be made on the [meeting] day”.
  • In FX, the MXN outperformed its peers, trading at 17.91/USD (+0.73%), amid ongoing improvement in market sentiment. According to the Commitments of Traders report (up to June 13), combined net long MXN positions (futures and options) of non-commercial players rose to 4-year highs. The CLP strengthened 0.20% to 664.34/USD. On the other hand, the COP depreciated 0.78% to 2,974.82/USD. The BRL posted losses, closing at 3.2919/USD (-0.51%).

Macro Backdrop

BRAZIL
  • According to the BCB, the IBC-Br Activity Index grew 0.28% mom s.a. in April. The result came slightly better than our forecasts (0.2%) and in line with market expectations (0.27%). Relative to the same month in 2016, IBC-Br fell 1.75%. In addition, the past series (from Jan-16 to Mar-17) has been revised downward by -0.9 p.p. to -0.2 p.p.. 
  • The BCB placed the full offering of 8,200 FX swaps. After closing, the central bank called for a roll over auction of up to 8,200 contracts on June 19. 
Market Developments 
  • GLOBAL MARKETS: Equity markets were on the green as volatility gauges receded. US treasuries narrowed (5-year: -2bps to 1.32%) as the dollar weakened vis-à-vis G10 (-0.29%). In Europe, we await the results of the French legislative elections this weekend, where Macron is expected to obtain a large majority. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Oil edged higher (WTI: +0.52% to 44.69/USD) but remained on track for losses for the week on lingering concerns over the glut in supply. Also, iron ore prices increased 0.55% and soybean gained 0.64%. In FX, currencies under our coverage were mixed. The MXN outperformed its peers trading at 17.91/USD (+0.73%) amid ongoing improvement in market sentiment. According to the Commitments of Traders report (up to June 13), combined net long MXN positions (futures and options) of non-commercial players rose to 4-year highs. The CLP strengthened 0.20% to 664.34/USD. On the other hand, the COP depreciated 0.78% to 2,974.82/USD. The BRL posted losses, closing at 3.2919/USD (-0.51%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Credit spreads for the 5-year tenor widened all across LatAm. In Chile, Mexico and Brazil spreads increased 2bps to 69bps, 110bps and 238bps, respectively. In Colombia, country risk went up 4bps to 128bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: In Brazil, markets reopened after Thursday’s holiday. The DI futures curve bull flattened as the Jan-18 fell 5bps to 9.11% and the Jan-21 went down 15bps to 10.11%. In an interview with Broadcast on Thursday, Governor Goldfajn affirmed the disinflation process and the accompanying reduction of interest rates is a given, but the pace of rate cuts is conditional. Namely, he stated the discussion revolves around the pace and extension of the easing cycle; these will depend on the evolution of both the reforms and adjustments as well as on the inflation and activity. He added the “decision will be made on the [meeting] day”. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican yields narrowed tracking US Treasuries. In TIIE swaps, while short rates stood mostly flat (9-month: at 7.40%), long yields fell (5-year: -7bps to 6.95%). Conversely, real rates narrowed as the Jun-19 went down 5bps to 3.12%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, rates widened at the margin in the session. In Camara swaps, the 1-year inched up 2bps to 2.51% and the 5-year went up 2bps to 3.44%. Chile Rates Tracker In Colombia, the curve bear steepened. In IBR swaps, the 1-year increased 1bp to 5.09% and the 5-year went up 5bps to 5.23%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, the Central Bank’s Quarterly Inflation Report (QIR) for Q2 will be released (Thu.). We expect the Central Bank’s inflation forecasts in the market scenario (BRL and interest rate according to the Focus survey) below 4.0% for 2017 and around the 4.5% target for 2018. Moreover, June’s IPCA-15 consumer inflation preview will be released (Fri.). We forecast a 0.14% monthly rise, with year-over-year inflation slowing to 3.5% from 3.8%. With this result, inflation will have reached 1.6% in the first half of the year, well below the 4.6% recorded during the same time window last year. In economic activity, May’s CAGED formal job creation may come through, for which we expect net loss of 9k jobs (seasonally adjusted), in line with milder contractions in job creation. Then, FGV’s industrial business confidence preview for June will be released (Thu.). Finally, CNI will release its industrial business confidence for June (Thu.). On fiscal accounts, May’s tax collection may be released throughout the week. 
  • In Mexico, the statistics institute (INEGI) will publish Q1’s aggregate supply (Tue). We expect it to grow at the pace of 4.1% year-over-year (up from 1.9% in 4Q16). Then, INEGI will publish CPI inflation figures for the first half of June (Thu.). We expect bi-weekly inflation to come in at 0.15%. June usually features a seasonal decrease of agricultural prices, but price surveys reported by the Ministry of Economy indicate that agricultural prices increased during the first half of June. Assuming our forecast is correct, annual inflation would increase to 6.30% year-over-year (from 6.16% in the second half of May). Moreover, the Central Bank’s board will meet to decide on the reference rate (Thu.). We expect Banxico to deliver a 25-bp hike, taking the reference rate to 7%, in lockstep with the U.S. Fed. Finally, INEGI will announce the growth rate of April’s retail sales (Fri.), which we forecast at 1.5% year-over-year (down from 6.1% in March). 
  • In Colombia, the trade balance for the month of April will be published (Tue.). We expect a trade deficit of USD 1.0 billion, broadly in line with the USD 1.1 billion deficit recorded one year ago. As a result, the rolling 12-month trade deficit would edge down to USD 10.0 billion, from USD 10.1 billion as of March and USD 11.5 billion in 2016. Then, the April activity coincident indicator (ISE) will be published (Thu.). The March index declined 0.9% year over year. Also, local think-tank Fedesarrollo will publish the May industrial and retail confidence indicators (Thu.). In April, the components of business confidence continued to deteriorate. Weak confidence suggests a solid recovery of Colombia’s economy is unlikely in the near term. 

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa




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