Itaú BBA - BRL underperforms, DI rates widen

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BRL underperforms, DI rates widen

October 23, 2017

The Brazilian curve steepened (Jan19x25: +4bps) as the BRL sold off (-1.29% to 3.2354/USD – weakest since July).

With information available until 6:30pm Brasilia time


  • The Brazilian curve steepened (Jan19x25: +4bps) as the BRL sold off (-1.29% to 3.2354/USD – weakest since July). In DI futures, the front end narrowed at the margin (Jan-18: -2bps to 7.29%) while the long end went up (Jan-21: +6bps to 8.93%). The breakevens curve shifted 2-3bps upwards. 
  • Elsewhere in LatAm FX, Andean pairs posted losses (CLP: -0.47% to 631.98/USD; COP: -0.49% to 2,952/USD). Then, the MXN is trading at 19.0814/USD (-0.44%) and the BRL sold off (-1.29% to 3.2354/USD – weakest since July). 

Macro Backdrop

  • Inflation expectations increased to 3.06% for 2017. According to Focus survey, inflation expectations increased to 3.06% (+6bps) for 2017 and remained stable at 4.02% for 2018 and 4.25% for 2019. Year-end Selic expectations remained flat for the three years horizon, at 7.00% for 2017 and 2018, and 8.00% for 2019. GDP growth expectations marginally increased to 0.73% (+1bp) for 2017 and did not change for 2018 and 2019 (both at 2.50%). Finally, the BRL was virtually flat for 2017 at 3.16/USD (from 3.15/USD), and for 2018 at 3.30/USD. For 2019, the BRL slightly appreciated to 3.33/USD (from 3.35/USD). See BCB Report
  • We are lowering our yearend inflation forecast to 1.8% (from 2.4%) for this year. Our revision is not only due to the downward surprise to inflation in September (which came in at -0.2% month-over-month) but also considers the lagged effect of the prolonged strong performance of the CLP. Furthermore, given an atypically low inflation in 3Q, annual inflation is expected to remain below the 2%-4% target range for the next 11 months, ending next year at 2.8%. However, risks to our 2018 forecast are tilted to the downside, so the odds the central bank increases the monetary stimulus in coming months are not small, although not our base scenario. 
  • Our baseline scenario is for the central bank to leave the policy rate unchanged at 2.5% for most of next year, but we cannot rule out additional rate cuts. In the most recent monetary policy decision, the BCCh reiterated it would lower interest rates further if it judges that the recent evolution of inflation threatens the convergence of inflation to the target in the relevant monetary policy horizon (2 years). Given inertia, the benign environment for emerging markets (which benefits the CLP) and a still-incipient activity recovery, we think the odds of such risks materializing are not small. Full Report


  • The coincident activity indicator (ISE) for the month of August is in line with an expected activity recovery in 3Q17. The seasonally adjusted series grew a mild 1.5% year over year (3.0% in July), above both Bloomberg market consensus and our forecast of 1.3%. A high base of comparison (due to the recovery following a transportation strike last year) led to the lower annual gain. As a result, growth in the quarter ending in August came in at 2.0%, notably superior to the 1.7% in 2Q17 and 0.5% in 1Q17. The rolling 12-month growth rate is now at 1.5%, from 1.3% as of June and March. Sequentially, activity accelerated to 5.6% qoq/saar in the quarter, from 2.5% in 2Q17 (-1.8% qoq/saar in 1Q17). Higher real wages (as inflation falls) and lower interest rates, along a favorable external environment, will likely help support the economy going forward. We believe an activity recovery in 2H17 will generate growth of 1.6% this year (2.0% in 2016), with a pickup to 2.5% growth next year.


  • Argentines voted in mid-term elections across the country on Sunday, with half of the seats in the lower chamber being contested. In addition there were elections in eight provinces for three Senate seats per province, which totals one-third of the Senate. 
  • The ruling coalition Cambiemos had an impressive performance at the national level (42% of total votes for representatives), improving the results obtained in the August primaries and leading to an increased representation of the government in Congress. Still, the government falls short of having a majority in either of the two chambers. The government is likely to get 107 representatives in the Lower House out of 257 (but up from the current 87 seats) according to preliminary estimates. In the Senate, Cambiemos will likely have 24 seats (out of 72).
  • The government won in the most important provinces, including the Province of Buenos Aires. Esteban Bullrich's list (Cambiemos) won the Senatorial race in the Province of Buenos Aires with 41% of the votes, ahead of former President Cristina Kirchner's (Unidad Ciudadana) with 37%. We note that the winners will get two of the three contested Senate seats, while the third seat will go to the runner-up. Cambiemos representatives in the Province of Buenos Aires also won the most votes. In all, with strong political power, the government will push to accelerate fiscal reforms. 
Market Developments
  • GLOBAL MARKETS: The Nikkei stock exchange outperformed global markets (+1.11%) following the general elections on Sunday. Prime Minister Abe’s coalition had a strong win, retaining its so-called super majority in parliament. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities posted gains on the back of metals and agriculture. Iron ore rose 1.85% and copper posted gains of 0.62%. Then, wheat (+2.52%) and corn (+1.96%) outperformed in agriculture. In energy, oil benchmarks were mixed (WTI: +0.41% to USD 52.05/bbl). LatAm FX depreciated in the session (-0.86%) as the . Andean pairs posted losses (CLP: -0.47% to 631.98/USD; COP: -0.49% to 2,952/USD). Then, the MXN is trading at 19.0814/USD (-0.44%) and the BRL sold off (-1.29% to 3.2354/USD – weakest since July). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads (5-year) traded range bound starting the week. In Chile, Mexico and Colombia, spreads were stable at 54bps, 106bps and 112bps, respectively. Meanwhile, Brazilian CDS inched up 1bp to 171bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve steepened (Jan19x25: +4bps) as the BRL sold off. In DI futures, the front end narrowed at the margin (Jan-18: -2bps to 7.29%) while the long end went up (Jan-21: +6bps to 8.93%). The breakevens curve shifted 2-3bps upwards. Brazil Rates Tracker
  • LOCAL RATES - Mexico: The belly of the Mexican curve narrowed 1-3bps, tracking US Treasuries. The 3-year TIIE swap fell 2bps to 7.18%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: Chilean yields narrowed substantially in the session. In Camara swaps, the 1-year fell 5bps to 2.37% and the 5-year went down 2bps to 3.49%. Chile Rates Tracker In Colombia, the belly of the IBR swaps curve widened 2-4bps while the front end was broadly stable (9-month at 4.74%). Colombia Rates Tracker

Upcoming Events

  • In Brazil, the Copom will meet again (Wed.). We maintain our call for a 0.75pp cut, followed by two 0.50pp reductions in the December and February meetings, bringing the Selic rate to the final level of 6.5%. On economic activity, FGV will release its industrial business confidence preview for October (Tue.). We expect a slight improvement in comparison with September, marking a fourth consecutive monthly increase. On fiscal accounts, the central government result for September will come through on (Thu.); we expect a BRL 26.4 billion deficit. Onto the balance of payments report (Thu.), we expect a USD 0.6 billion current account deficit in September. Also, we expect direct investment in the country (DIC) to register inflows of USD 6.5 billion in September. Finally, the charges against President Temer are expected to be voted in the Lower House floor (Wed.).
  • In Mexico, the statistics institute (INEGI) will publish CPI inflation figures for the first half of October (Tue.). We expect bi-weekly inflation to post 0.64%. Furthermore, INEGI will publish August’s monthly GDP proxy (IGAE), whose growth we expect to accelerate to 1.4% year-over-year. Moreover, INEGI will announce August’s retail sales (Wed.). We estimate that retail sales’ growth deteriorated to 0.3% year-over-year. Finally, INEGI will announce September’s trade balance (Thu.). We expect the trade deficit to narrow.
  • In Colombia, the national statistics agency (DANE) will release the coincident activity indicator (ISE) for the month of August (Mon.). We expect the coincident indicator to post growth of 1.3% yoy (adjusted for calendar effects). Then, think-tank Fedesarrollo will release the September Industrial and Retail confidence indices (Wed.). Finally, Banrep holds its monthly monetary policy meeting (Fri.). It remains likely that the majority of the board will opt to extend the pause (policy rate at 5.25%) in the easing cycle as it evaluates the inflation trend.
  • In Argentina, the central bank will hold its biweekly monetary policy meeting, to decide on the reference rate (Tue.). We expect the central bank to hold off on raising the policy rate, but the probability of higher interest rates is increasing. Then, the trade balance for September will come out (Tue.). We expect a trade deficit of USD 363 million in September. Still, the INDEC will publish the EMAE (official monthly GDP proxy) for August (Tue.). We expect activity to grow 3.9% year-over-year (0.2% mom/sa).

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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