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BRL reverts earlier losses on commodities

June 28, 2017

The upbeat performance of commodities lent a helping hand to LatAm FX.

With information available until 6:30pm Brasilia time

Highlights

  • The upbeat performance of commodities lent a helping hand to LatAm FX. The BRL outperformed its peers (0.96% to 3.2826/USD), followed by oil-exporters (MXN: 0.77% to 17.85/USD; COP: 0.35% to 3,018.94/USD). The CLP stood flat at 662.77/USD (-0.09%), as the copper gains (0.54%) offset the rise in oil prices.
  • Brazilian rates generally reverted Tuesday’s movements, tracking the good performance of the BRL. DI futures narrowed across the curve, as the Jan-19 fell 5bps to 8.94% and the Jan-21 dropped 11bps to 10.14%. Breakevens also paid back to the previous session sell-off: the 5-year edged down 4bps to 4.72% and the 5y5y forward tightened 5bps to 4.86%. Similarly, Mexican nominals inched down 1bp in average, buoyed by the MXN solid performance. In TIIE swaps, the 5-year decreased 1bp to 6.74%.

Macro Backdrop

BRAZIL
  • New loans decline in May, following back-to-back gains. BCB released the credit figures for the month of May. The daily average of new non-earmarked loans declined 5.1% mom/sa in real terms, driven by drops of 5.2% in loans for non-financial corporations and 5.0% for households. Adjusted for inflation, new earmarked loans fell 10.6% mom/sa, amid a 21.0% drop for non-financial corporations and an uptick of 0.5% for households. The share of state-owned banks in the credit market was unchanged at 55.9%. Seasonally-adjusted delinquency in non-earmarked loans increased 0.2 p.p. to 5.8% among non-financial corporations, and was unchanged among households, also at 5.8%. As for earmarked credit, delinquency increased for both segments, to 2.1% from 2.0%. Interest rates charged on non-earmarked loans dropped to 46.8% from 49.3%, declining for non-financial corporations and households alike. Meanwhile, average interest rates charged on earmarked loans rose to 10.2% from 9.8%, climbing for non-financial corporations and households. In all, the data continues to be consistent with stabilization in new consumer loans, while there are doubts as to whether new businesses loans have effectively stabilized. Full Report
  • According to FGV’s latest industry survey, business confidence in the industrial sector (FGV) fell 3.0% mom s.a. in June, slightly below the preview (-2.5%). The decline reflects the increase in political uncertainty and suggests the new outlook will indeed affect economic activity in the short term. Current industrial demand rose 0.9% following a steep gain in the previous survey (+9.5%), while expected demand fell 1.1% on the more uncertain outlook. The confidence breakdown shows declines in both the current situation index (-2.2%) and expectations (-3.8%). Capacity utilization fell 0.5pp to 74.2%. Excessive minus insufficient inventories rose slightly to 8.1% (previous: 7.0%). Six out of twenty activities showed an increase (diffusion: 30%), consistent with the weak aggregate result for confidence. Business Confidence Heatmap
  • BCB placed the full offering of 8,200 FX swaps (USD 410 million). After closing, it announced a slightly smaller auction of USD 380 million - the remaining amount expiring in July.
Market Developments
  • GLOBAL MARKETS: UK yields widened (5-year gilts: +5bps to 0.61%) and the GBP rose 0.90% owing to BoE’s Carney remarks at the European Central Bank Forum. He said “some removal of monetary stimulus is likely to become necessary”, if the spare capacity in the economy diminishes. Global Markets Tracker

  • CURRENCIES & COMMODITIES: Oil posted gains for the fifth session in a row, as WTI rose 1.21% to 45.03/bbl. The DOE report confirmed expectations of another build-up in US crude inventories, but also showed a reduction in oil production. The upbeat performance of commodities lent a helping hand to LatAm FX. The BRL outperformed (0.96% to 3.2826/USD), followed by oil-exporters (MXN: 0.77% to 17.85/USD; COP: 0.35% to 3,018.94/USD). The CLP stood flat at 662.77/USD (-0.09%), as the copper gains (0.54%) offset the rise in oil prices. FX & Commodities Tracker

  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads (5-year) were mixed. Brazil risk premium inched down 2bps to 239bps, whereas Mexico (11bps) and Colombia (132bps) widened 1bp each. Chilean CDS stood afloat at 65bps. External Bonds and CDS Tracker

  • LOCAL RATES – Brazil: Rates generally reverted Tuesday’s movements, tracking the good performance of the BRL. DI futures narrowed across the curve, as the Jan-19 fell 5bps to 8.94% and the Jan-21 dropped 11bps to 10.14%. Breakevens also paid back to the previous session sell-off: the 5-year edged down 4bps to 4.72% and the 5y5y forward tightened 5bps to 4.86%. Brazil Rates Tracker

  • LOCAL RATES - Mexico: Nominals inched down 1bp in average, buoyed by the MXN solid performance. In TIIE swaps, the 5-year decreased 1bp to 6.74%.Mexico Rates Tracker

  • LOCAL RATES – Chile and Colombia: Chilean yields traded in ranges. Chile Rates Tracker In Colombia, IBR swaps were also mixed: the 1-year inched down 1bp to 5.05% and the 10-year widened 2bps to 6.05%. The curve still sees almost 90bps in rate cuts coming this year, and further 41-77bps worth of monetary easing in 2018 (depending on the term premium assumption).Colombia Rates Tracker

Upcoming Events

  • In Brazil, the week’s highlight will be the National Monetary Council meeting (Thu.). The CMN will decide on the 2019 inflation target and the TJLP long term interest rate. In our view, a lower inflation target for 2019 would reinforce the outlook for lower inflation and anchored expectations. Local news have been indicating a reduction in the 2019 inflation target to 4.25% or 4.0% (from 4.5%). In addition, we expect no change to the TJLP in the near future, currently at 7.0%. Moreover, the nationwide unemployment rate for May will come out (Fri.), and we expect a 0.2% increase to 13.4% (our seasonal adjustment). On fiscal accounts, the consolidated primary budget balance for May will come through (Fri.). We expect a BRL 21.5 billion deficit.
  • In Mexico, the Ministry of Finance will announce May’s fiscal balance (Fri.). We expect the fiscal deficit indicators to continue narrowing, as fiscal consolidation makes headway.
  • Activity data is on the spotlight in Chile. The national statistics agency (INE) will publish the industrial activity indicators for the month of May (Fri.). We expect manufacturing production to decline 0.3% from last year (-7.5% in April). INE will also publish the national unemployment rate for the quarter ending in May (Fri.). We expect the unemployment rate to reach 6.9% (6.8% one year ago).
  • In Colombia, we expect Banrep to deliver another 25-bp rate cut (taking the policy rate to 6.0%) in its monthly monetary policy meeting (Fri.). The unemployment rate for the month of May will be also released (Fri.). We expect the labor market to remain weak ahead amid low dynamism of the Colombian economy and see the urban unemployment rate to rising to 10.7% in May.

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza



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