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Currencies weaken on softer-than-expected Chinese data

November 14, 2017

Commodity-linked FX posted losses (-0.75%) as the Chinese industrial production surprised to the downside.

With information available until 6:30pm Brasilia time

Highlights

  • Commodity-linked FX posted losses (-0.75%) as the Chinese industrial production surprised to the downside. The BRL was the regional laggard, closing at 3.3092/USD (-0.90%). The MXN is trading at 19.1528/USD (-0.13%). The COP depreciated 0.30% to 3,017/USD and the CLP weakened 0.26% to 631.93/USD. 
  • Short Colombian yields fell 1-3bps, boosting our Receive 18m IBR rates. The 9-month fell 3bps to 4.44% and the 1-year fell 2bps 4.43%. 

Macro Backdrop

BRAZIL
  • Retail sales rebound in September. Core retail sales advanced 0.5% mom/sa in September, close to the median of market estimates (0.3%) and our call (0.7%). Meanwhile, broad retail sales rose 1.0% mom/sa, slightly above the median of market estimates (0.9%) and our forecast (0.7%). Compared to September 2016, core sales expanded 6.4% and broad retail sales climbed 9.3%. Results suggest that retail sales resumed an upward trend following two slower months that probably reflected a reversal of the temporary boost provided by withdrawals from inactive accounts held under employment protection program FGTS.
  • Going forward, we expect growth in retail sales to continue in the coming months, driven by falling interest rates, lower debt levels among households, and gradual improvement in the labor market. For the time being, we forecast gains of 1.1% and 0.4% in core and broad retail sales in October, respectively. Full Report
CHILE
  • The BCCh opted to leave the monetary policy rate on hold at 2.5% in November. The move was widely anticipated by the market after inflation surprised to the upside in October. In our view, the easing bias retained in the press release is signaling the board remains attentive to volatile inflation prints, rather than a commitment to increase the monetary stimulus. In fact, we see the rate remaining stable at 2.5% for most of 2018. 
  • As time passes – with activity improving and disinflationary risks fading –, the opportunity for the board to implement additional rate cuts diminishes. Back in September, the central bank signaled the end of the easing cycle that saw the policy rate drop by 100bps (from 3.5%) in the first five months of the year. Full Report Below

COLOMBIA

  • The September trade balance was a USD 274 million deficit, in line with our forecast but smaller than market consensus (USD 347 million deficit). The print comes in much below the USD 1 billion deficit recorded in September 2016 and was favored by a firm recovery in traditional exports and a still weak internal demand. As a result, the deficit in 3Q17 came in at USD 1.7 billion, below the USD 3.0 billion deficit recorded in 3Q16, leading to a narrowing of the 12-month rolling deficit to USD 8.5 billion (from USD 11.5 billion in 2016). The improvement in the energy balance continues to explain the bulk of the narrowing in the trade deficit, while the non-energy balance remained broadly stable. At the margin, our own seasonal adjustment shows a sharp correction of the trade deficit in 3Q17 to USD 6.3 billion deficit from USD 11.4 billion in 2Q17. A narrower trade deficit is consistent with a lower current account deficit. 
  • The trade deficit will continue to gradually moderate as higher energy prices (compared to last year) favor exports, while internal demand expands at a moderate pace. We continue to expect a current account deficit of 3.7% of GDP this year, below the 4.3% recorded in 2016. Full Report

ARGENTINA

  • National inflation decelerated in October, but from a high reading in September. Consumer prices gained 1.5% from September to October, in line with market expectations (consensus: 1.5%). The reading decelerated from the previous month (1.9% mom), but remained above the 20% yoy levels. The last-three-month cumulative inflation fell to an annualized 21.2%, from 21.9% in September. Prices have increased by 19.4% year to date, surpassing the upper band of the 12%-17% central bank target range for 2017. The core reading increased by 1.3% mom in October, after posting a 1.6% average over the last three months.
  • Despite some relief in the core reading, the 2018 target is still distant (10%+-2%). We expect no changes in the monetary policy rate for the rest of the year. However, until inflation resumes a convincing downtrend, the risks are tilted toward rate hikes in the short term.  We recently adjusted our headline inflation forecast for 2017 and 2018 to 23% and 18%, respectively, from 22% and 16% in our previous scenario. Full Report
Market Developments
  • GLOBAL MARKETS: The EUR strengthened (+1.09% to 1.1791/USD) after the euro area 3Q17 GDP was revised up to 0.61% from 0.58%. Equity markets were on the red as the USD weakened vis-à-vis DMs and US Treasuries narrowed (5-year: -2bps to 2.06%). Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities posted losses in the session (CRB futures: -1.25%) on the back of weaker-than-expected Chinese data (industrial production). Oil prices were further dragged (WTI: -1.84% to USD 55.92/bbl) after the monthly IEA report showed a downbeat outlook for oil demand. The agency cut its oil demand growth forecast by 100k barrels per day for 2017 and 2018. In metals, iron ore dropped 2.53% and copper fell 1.85%. In currencies, commodity-linked FX posted losses (-0.75%). The BRL was the regional laggard, closing at 3.3092/USD (-0.90%). The MXN is trading at 19.1528/USD (-0.13%). The COP depreciated 0.30% to 3,017/USD and the CLP weakened 0.26% to 631.93/USD. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Credit spreads (5-year) widened at the margin all across LatAm. In Brazil, Mexico, Chile and Colombia, CDS inched up 1bp to 181bps, 112bps, 54bps and 124bps, respectively. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve steepened once again, as the BRL weakened. In DI futures, the long end widened substantially as the Jan-25 increased 13bps to 10.73%. The inflation-linked curve went up 1-2bps. Brazil Rates Tracker
  • LOCAL RATES – Mexico: Mexican yields widened in the session. In TIIE swaps, the 1-year increased 3bps to 7.57% and the 5-year went up 2bps to 7.33%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: The belly of the Chilean curve widened 4bps. In Camara swaps, the 2-year went up 4bps to 2.76% and the 5-year increased 2bps to 3.51%. Chile Rates Tracker Short Colombian yields fell 1-3bps. In IBR swaps, the 1-year fell 2bps whereas the long end widened (10-year: +2bps to 6.27%). Colombia Rates Tracker

Upcoming Events

  • In Brazil, October’s CAGED formal job creation may come through. We forecast a net creation of 17k jobs (+11k jobs in seasonally adjusted terms). Then, the Service Sector Survey, PMS will be released (Fri.). We expect a 0.7% mom/sa increase in both core and broad retail sales. For September’s PMS, we expect the headline to fall 2.4% yoy.
  • In Colombia, the national statistics authority will publish the supply-side breakdown of GDP growth for 3Q17 (Wed.). We estimate activity increased 1.0% from the previous quarter. Furthermore, think-tank Fedesarrollo will release the October consumer confidence (Fri).

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


Macro Reports

CHILE – Monetary Policy Meeting: On hold, as expected

The central bank of Chile opted to leave the monetary policy rate on hold at 2.5% in November. The move was widely anticipated by the market after inflation surprised to the upside in October. In our view, the easing bias retained in the press release is signaling the board remains attentive to volatile inflation prints, rather than a commitment to increase the monetary stimulus. In fact, we see the rate remaining stable at 2.5% for most of 2018.


The board continues to monitor risks to the convergence of inflation to the 3% target. The press release noted that the upside surprise to inflation recorded in October partially compensated the opposite result in the previous month. The board even noted that medium term inflation expectations remain broadly unchanged, despite still low short-term forecasts.


Activity that is evolving in line with central bank expectations also supported the decision to stay put. The central bank is confident 3Q17 growth (to be published on November 20) will show firming activity (we expect a 2.2% growth rate in the quarter, following a 0.5% year over year expansion in 1H17). On the positive side, the board noted consumption is evolving in line with the labor market and that sentiment has turned less pessimistic. However, the press release stressed that construction is a drag to investment. Additionally, the favorable evolvement of commodity prices and stable global financial conditions were also highlighted.


As time passes – with activity improving and disinflationary risks fading –, the opportunity for the board to implement additional rate cuts diminishes. Back in September, the central bank signaled the end of the easing cycle that saw the policy rate drop by 100bps (from 3.5%) in the first five months of the year.

 

Miguel Ricaurte, Vittorio Peretti



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