Itaú BBA - Brazilian assets stage a retracement

Latam FI Strategy Daily

< Back

Brazilian assets stage a retracement

November 6, 2017

The BRL outperformed the majors, closing at 3.2517/USD (+1.91%).

With information available until 6:30pm Brasilia time


  • The BRL outperformed the majors, closing at 3.2517/USD (+1.91%). This way, the DI futures curve bull flattened (Jan19x25: -15bps). The Jan-21 narrowed 13bps to 9.28%.
  • Elsewhere in LatAm FX, the MXN is trading at 19.0502/USD (+0.80%) as oil benchmarks rallied (Brent: +3.16% to USD 63.75/bbl) and the CLP appreciated 0.19% to 633.30/USD.
  • In Colombia and Argentina, markets were closed due to national holidays.

Macro Backdrop

  • Inflation expectations for 2018 remained stable at 4.02%. According to Focus survey, inflation did not change for 2017, 2018 and 2019 at 3.08%, 4.02% and 4.25%, respectively. Year-end Selic expectations also remained flat for the three years horizon, at 7.00% for 2017 and 2018, and 8.00% for 2019. GDP growth expectations did not change for 2017 (at 0.73%), and also remained flat for 2018 and 2019 (both at 2.50%). Finally, the BRL was virtually flat for 2017 at 3.20/USD (from 3.19/USD); for 2018 at 3.30/USD; and for 2019 at 3.33/USD (from 3.34/USD). See BCB Report
  • We published our Scenario Review for the month of November. We have revised our GDP growth forecast for 2017 (to 2.1%, from 2.3%) in response to the slowdown observed in 3Q17 (largely explained by the one-off effects the earthquakes). Moreover, we now expect annual CPI inflation at 5.9% by the end of 2017 (from 5.7% in our previous scenario) because inflation for core goods (tradables) is falling slower than expected. Full Report
  • Activity strengthened in the third quarter of the year. The rebound of mining activity is currently the main driver behind better growth figures; however, non-mining activity has shown some consolidation as well. The Imacec (monthly proxy for GDP) grew 1.3% year over year in September (2.4% in August), close to our 1.5% forecast and the 1.6% market consensus. Once corrected for seasonal and calendar effects, growth in September was somewhat higher at 1.8% (2.2% in August). Overall, Imacec rose 2.2% in the third quarter, up from the 0.9% in 2Q17. At the margin, activity accelerated to 6.1% qoq/saar from 3.1% in 2Q17 and 0.3% in 1Q17, boosted by mining, which sped up to 44.8% qoq/saar (2Q17: +26.2%; 1Q17: -24.4%).
  • Low inflation, an expansionary monetary policy, improving private sentiment and higher copper prices will all aid an activity recovery. We expect growth of 1.7% this year (1.6% in 2016) and a pick-up to 2.7% next year. As shown in the central bank’s recent business perception report, the outcome of the general election will likely have a significant influence on confidence and consequently on investment decisions and growth. Still, business confidence is already rising: although it completed 43 consecutive months in pessimistic territory, business sentiment posted the largest year-over-year gain since dipping below the neutral level of 50 points in April 2014. Full Report
  • We published our Scenario Review for the month of November. Having revised our copper price forecasts up (see Commodities Monthly Review), we now see the CLP ending the year at 650/USD (665/USD previously), and 660/USD by the close of 2018 (675/USD previously). Higher copper prices are consistent with a narrower current-account deficit (1.2% of GDP for 2018, from 1.4% in our previous scenario). Low inflation, an expansionary monetary policy, improving private sentiment and higher global growth will all aid an activity recovery. We expect growth of 1.7% this year (1.6% in 2016) and a pick-up to 2.7% next year. Full Report


  • Inflation once again surprised to the downside in October. Prices gained 0.02% in the month, below the market consensus and our forecast (both at +0.10%). Due to unfavorable base effects, the resulting 12-month inflation picked up to 4.05% (3.97% in September), the first print above the central bank’s 4.0% upper bound since May this year. In spite of non-tradable inflation – which is the component of consumer prices more linked to domestic factors – remaining sticky, the lower-than-expected headline reading risks further rate cuts in the short-term. Looking ahead, we now expect yearend inflation of 3.9% (4.2% previously), partly due to downside surprises to inflation in the last two months, which have totaled 0.22 p.p..
  • The recent improvement in the inflation outlook has led the central bank to recommence the easing cycle earlier than expected. Last month, the central bank surprised the market by cutting the policy rate by 25bps to 5.0%, while the market expected the bank to remain on hold until early 2018. As the inflation outlook continues to improve, we cannot rule out additional cuts before the end of this year. Full Report


  • Commodities Monthly Review: Higher copper prices, lower agricultural prices. Commodity prices rose in October, boosted by 4.4% increase in its energy subcomponent. We increased our yearend copper and nickel forecasts. On the other hand, we lowered our forecasts for agricultural prices. In all, we expect a 5.3% drop in the ICI from its current level by year-end, led by metal and energy prices. Full Report
Market Developments
  • GLOBAL MARKETS: Core yields narrowed (5-year US Treasury: -1bp to 1.98%) and the USD weakened vis-à-vis DM pairs. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities were strong on the green in the session (CRB futures: +1.68%). In energy, oil prices climbed (Brent: +3.16% to USD 63.75/bbl – highest since June 2015) on fresh new political developments in the Middle East region. In agriculture, sugar increased 1.25% and wheat +1.17%. Finally, in metals, iron ore soared 6.32% and copper strengthened 1.27%. LatAm FX staged a recovery (+1.22%) on the back of a weaker USD and higher commodity prices. The BRL outperformed the majors, closing at 3.2517/USD (+1.91%). The MXN is trading at 19.0502/USD (+0.80%) as oil benchmarks rallied. The CLP appreciated 0.19% to 633.30/USD. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Credit spreads for the 5-year inched down in LatAm. In Brazil and Mexico, CDS narrowed 1bp to 172bps and 107bps, respectively. Colombian and Chilean country risk were stable at 117bps and 51bps, respectively. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve bull flattened (Jan19x25: -15bps) on the back of a stronger BRL (+1.91%). In DI futures, the Jan-21 narrowed 13bps to 9.28%. Brazil Rates Tracker
  • LOCAL RATES – Mexico: Mexican yields narrowed 3-5bps amid falling US Treasuries. In TIIE swaps, the 1-year fell 4bps to 7.48% and the 5-year decreased 5bps to 7.21%. Breakevens also went south as the 5-year closed at 3.73% (-5bps). Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, rates fell 1-3bps also on the back of falling core yields. In Camara swaps, the 9-month went down 2bps to 2.39% and the 10-year inched down 1bp to 4.15%. Chile Rates Tracker In Colombia, markets were closed due to a national holiday.

Upcoming Events

  • In Brazil, October’s IPCA consumer inflation will be released (Fri.). We forecast a 0.50% monthly increase, with year-over-year inflation rising to 2.78% from 2.54%. The market will also remain focused on the political news flow. After the Lower House rejected the charges against President Temer, the government will likely try to resume discussions on the reform agenda, especially the social security reform. On economic activity, the key releases will be coincident indicators for October: Anfavea’s auto production (Tue.), traffic of heavy vehicles and paper cardboard dispatches (ABCR and ABPO, respectively).
  • In Mexico, the statistics institute (INEGI) will publish August’s gross fixed investment (Tue.). We estimate that gross fixed investment contracted 1% year-over-year. Moreover, INEGI will announce October’s CPI inflation (Thu.). We expect a 0.60% month-over-month variation, driven by the energy and regulated prices. Still, Banxico will hold its monetary policy meeting (Thu.). We expect the board to keep the reference rate at 7%. Finally, INEGI will publish September’s industrial production (Fri.). We estimate that industrial production fell by 2.2% year-over-year.
  • In Chile, the BCCh will also publish the minutes of the October monetary policy meeting (Tue.). The minutes will probably show that the likelihood of further easing will hinge on incoming inflation prints. Moreover, the central bank will publish the trade balance for the month of October (Tue.). We expect a trade surplus of USD 450 million. Later, INE will publish nominal wage growth for September (Tue.). Finally, inflation for the month of October will be released (Wed.). We expect consumer prices to have gained 0.3% from September.
  • In Colombia, Banrep will publish the minutes of the surprise decision to cut the policy rate by 25-bp (to 5.0%) at the October monthly meeting (Fri.). We expect the minutes to show that further cuts will be data dependent.
  • In Argentina, the central bank will hold its biweekly monetary policy meeting, to decide on the reference rate (Tue.). In the last meeting, the central bank surprised the market by raising the monetary policy rate by 150bps, to 27.75%.

For details, refer to our Monthly Strategy Report.

For details on Brazilian markets, refer to our Handbook - First edition.

Today's editors: Eduardo Marza, Pedro Correa

< Back