Itaú BBA - BRL outperforms as CDS reaches 32-month low

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BRL outperforms as CDS reaches 32-month low

September 15, 2017

The BRL (+0.34% to 3.1104/USD) outperformed in LatAm FX (+0.16%) as CDS fell to 180bps (-2bps).

With information available until 6:30pm Brasilia time


  • The BRL (+0.34% to 3.1104/USD) outperformed in LatAm FX (+0.16%) as CDS fell to 180bps (-2bps) – lowest since December 2014. By the time of writing, the MXN is trading at 17.6607/USD (+0.03%) and the COP closed at 2,897/USD (+0.07%). Bucking the regional trend, the CLP depreciated 0.18% to 625.53/USD. 
  • The Brazilian curve steepened ahead of the weekend (Jan19x25: +8bps). In DI futures, the Jan-19 fell 2bps to 7.52% and the Jan-25 widened 6bps to 9.93%. 
Macro Backdrop


  • BCB placed the full offering of 12,000 FX swaps. After closing, it announced another roll over auction of up to 12,000 contracts (USD 600 million) on September 18. 


  • The minutes of the central bank’s August monetary policy meeting show a vivid debate between inflation and activity. All board members noted the better than expected behavior of inflation, at the time activity had reached a turning point and appeared to be headed towards a better second half of the year. However, while concerns with the pace of disinflation among the majority in the board justified acting cautiously, the minority favored a more aggressive response given weak activity. In the end, a three-way split board cut the policy rate by 25bps to 5.25% at this meeting. 
  • Given the board’s comments, we see the data following the monetary policy meeting will tilt the balance towards staying on hold this month. Favorable July activity indicators could ease concerns on economic growth. Meanwhile, inflation picked up in August and core measures remained above the target range, broadly in line with expectations. Hence, we see the policy rate ending the year at 5.25%, with rate cuts resuming in 2018, once inflation re-enters the target range, taking the policy rate to 4.50% by the end of next year. Full Report
  • In August, consumer confidence completed 20 consecutive months in pessimistic territory (below 0), and the signs of improvement weakened. Think-tank Fedesarrollo’s consumer sentiment index came in at -15.9 points, worse than the -6.6 points one year before (July: -9.5). Both divisions (expectations and current economic conditions) deteriorated from August 2016 (as well as July). Consumer expectations slumped (-15.0 vs. -0.8 one year ago), due to a worse outlook on the economic conditions of Colombia over the next 12-months. Meanwhile, the deterioration in current economic conditions (-17.3 points versus -15.3 one year ago) came from gloomier households regarding their current economic condition, even though more respondents saw this is an opportune time to purchase household appliances. While the latter index could point at a sustained recovery in retail activity in coming months, the overall deterioration does not bode well for the expected recovery ahead. A more stable currency, low inflation, and a less tight monetary policy would support a pick-up in activity in 2H17. We expect growth of 1.6% this year (2% last year). 
  • The current account deficit for 2Q17 came in at USD 2.7 billion, in line with our call and broadly stable from one year before. The rolling four-quarter deficit inched up to USD 12.4 billion (4.1% of GDP), from an upwardly revised USD 12.3 billion in 2016 (4.3% of GDP). At the margin, our own seasonal adjustment confirms the current account adjustment is happening at a slower pace, with the current account deficit recording a 4.4% of GDP (4.6% in 1Q17 and 3.8% in 4Q16). Also, direct investment in the country came in at USD 2.7 billion in 2Q17, below the USD 3.6 billion recorded in 2Q16. This means direct investment in the rolling-4Q period continues to shrink from the USD 13.7 billion in 2016 (4.9% of GDP, favored by the privatization of ISAGEN), as it came in at USD 10.7 billion (3.6% of GDP). 
  • The slower correction of external imbalances puts an upside risk to our current-account deficit forecast of 3.7% of GDP this year (below the 4.3% recorded in 2016). However, a still feeble internal demand and higher terms of trade (compared to last year) will favor some narrowing in coming quarters. Full Report

Market Developments 

  • GLOBAL MARKETS: Risk on day with US treasuries trading higher (5-year: +3bps to 1.80%) and decreased volatility gauges. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities were lifted by stronger grain prices. Wheat surged 5.64%, corn went up 3.67% and sugar increased 1.96%. On the other hand, metallic commodities were the main drag as iron ore dropped 2.68%. Finally, oil prices rose at the margin (WTI: +0.14% to USD 50.42/USD). The BRL (+0.34% to 3.1104/USD) outperformed in LatAm FX (+0.16%). By the time of writing, the MXN is trading at 17.6607/USD (+0.03%) and the COP closed at 2,897/USD (+0.07%). Bucking the regional trend, the CLP depreciated 0.18% to 625.53/USD. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads for the 5-year tenor narrowed. In Brazil, Chile and Colombia CDS went down 2bps to 180bps, 52bps and 112bps, respectively. In Mexico, country fell by 1bp to 98bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve steepened ahead of the weekend (Jan19x25: +8bps). In DI futures, the Jan-19 fell 2bps to 7.52% and the Jan-25 widened 6bps to 9.93%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Long Mexican yields narrowed. In TIIE swaps, while short rates and the belly traded range bound, the 10-year fell 2bps to 7.05%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: The belly of the Chilean curve inched up1bp. In Camara swaps, the 2-year widened 1bp to 2.67%. Chile Rates Tracker The front end of the Colombian curve narrowed in the session. In IBR swaps, while short yields fell (9-month: -1bp to 4.86%), long ones widened (10-year: +1bp to 6.07%). Colombia Rates Tracker

Upcoming Events

  • In Brazil, the Central Bank’s Quarterly Inflation Report (QIR) for 3Q17 will be released (Thu.). The market will be especially watchful of the Central Bank’s communication regarding the next policy meeting on October 25. Then, September´s IPCA-15 consumer inflation preview will be released (Thu.). We forecast a 0.10% monthly rise, with year-over-year inflation slowing to 2.55% from 2.7%. On economic activity, August’s CAGED formal job creation may come through. We expect a net creation of 30k jobs seasonally adjusted. FGV’s industrial business confidence preview and consumer confidence for September will both be released on Friday. On fiscal accounts, August’s tax collection will be released throughout the week. Finally, the second round of corruption charges against President Temer have been sent to the Supreme Court, who may forward them to Congress. The Supreme Court Minister responsible for the Lava Jato case, Edson Fachin, decided to send the charges to Congress only after the Court decides whether or not to suspend the charges until the revision of evidence contained in the plea bargain deal grounding the charges set forth by Attorney-General Rodrigo Janot. This trial is scheduled for September 20 (Wed.). 
  • In Mexico, the statistics institute (INEGI) will announce July’s retail sales (Thu.). We estimate that retail sales’ growth picked up to 1.5% year-over-year. Then, INEGI will publish CPI inflation figures for the first half of September (Fri.). We expect bi-weekly inflation to post 0.40%. Still, INEGI will also publish 2Q’s aggregate supply, which we expect to grow at the pace of 2.3% year-over-year (down from 4% in 1Q17). 
  • In Colombia, the trade balance for the July will be published (Mon). We expect a trade deficit of USD 591 million. Moreover, the national statistics agency (DANE) will release the coincident activity indicator (ISE) for the month of July (Fri.). We expect the annual expansion of the seasonally adjusted series of ISE to be 4.0%. 
  • In Argentina, the fiscal accounts for August will see the light (Wed.). We expect the government to meet its official target deficit of 4.2% of GDP in 2017. Then, the INDEC will release the GDP figures for 2Q17 (Thu). The EMAE (an official monthly GDP proxy) anticipated that the economy has expanded 2.7% year over year in that quarter and 0.8% quarter over quarter, adjusted by seasonality.  

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

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