Itaú BBA - COP underperforms again as oil falls to 10-month lows

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COP underperforms again as oil falls to 10-month lows

June 21, 2017

The COP ranked the second bottom performer within EMFX, as oil prices kept going down.

With information available until 6:30pm Brasilia time

Highlights

  • Oil prices kept going down, even after the EIA report showed US crude inventories decreased for the tenth week in a row. WTI tested the intra-day highs in a short-lived reaction to the DOE data, but later plunged back to pre-release levels (-2.32% to USD 42.50/bbl). In FX, the COP ranked the second bottom performer within EMFX (-0.82% to 3,058.20/USD), while the MXN was trading at 18.24/USD (-0.26%) when we wrote this piece. The BRL depreciated 0.25% to 3.3358/USD and the CLP closed at 665.32/USD (-0.21%).
  • In rates, the Brazilian benchmark nominal curve steepened, as DI futures up to the Jan-19 narrowed 3-5bps and the back end widened 4bps in average. The Jan-18 fell 4bps to 9.03% and the Jan-25 rose 6bps to 10.80%. Ahead of the publication of the all-important 2Q17 Inflation Report, the curve implies 85bps in rate cuts for the Copom’s July meeting. For the remainder of the year, the front end prices-in 167bps in monetary easing.

Macro Backdrop

BRAZIL
  • BCB placed the full offering of 8,200 FX swaps. After closing, it announced another roll over auction of up to 8,200 (USD 410 million) contracts on June 22.
Market Developments
  • GLOBAL MARKETS: Eonia swaps widened 1bp in the front end and the belly, tracking the movement in UK rates. Gilts in the 5-year sector widened as much as 6bps after the BoE’s Chief Economist BoE’s Andy Haldane warned that the bank runs a risk of leaving it too late to tighten interest rates. His comments increased market perceptions that UK policy makers are becoming increasingly restless as inflation breaches the 2% target. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Oil prices kept going down, even after the EIA report showed US crude inventories decreased for the tenth week in a row. WTI tested the intra-day highs in a short-lived reaction to the DOE data, but later plunged back to pre-release levels (-2.32% to USD 42.50/bbl). In FX, the COP ranked the second bottom performer within EMFX (-0.82% to 3,058.20/USD), while the MXN was trading at 18.24/USD (-0.26%) when we wrote this piece. The BRL depreciated 0.25% to 3.3358/USD and the CLP closed at 665.32/USD (-0.21%).FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads (5-year) widened again, amid a broad commodity rout. Brazilian risk premium widened the most (+5bps to 246bps), followed by Colombia’s (+4bps to 139bps). Mexico increased 2bps (to 115bps), while Chilean CDS inched up 1bp to 70bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The nominal curve steepened, as DI futures up to the Jan-19 tightened 3-5bps and the back end widened 4bps in average. The Jan-18 fell 4bps to 9.03% and the Jan-25 rose 6bps to 10.80%. Ahead of the publication of the all-important 2Q17 Inflation Report, the curve implies 85bps in rate cuts for the Copom’s July meeting. For the remainder of the year, the front end prices-in 167bps in monetary easing. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican yields edged higher for the third straight session. In TIIE swaps, the 5-year rose 3bps to 7.05%. Breakevens also went north, as the 10-year rose 4bps to 3.78% and the 5y5y widened 5bps to 3.80%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: Chilean rates traded in ranges. In Camara swaps, the 5-year stood flat at 3.43%. The curve implies 50bps in rate hikes for 2018. Chile Rates Tracker Colombian yields widened past the 2-year, pressured by the COP weakening. In IBR swaps, the 5-year increased 2bps to 5.37%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, the 2Q17 Quarterly Inflation Report (Thu.) is on the limelight. 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. Also important, 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, Banxico's monetary policy committee will meet to decide on the reference rate (Thu.). We expect the board to deliver a 25-bp hike, taking the reference rate to 7%, in lockstep with the U.S. Fed. Moreover, the statistics institute (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% (from 6.16% in the second half of May). 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 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.).

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza



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