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Global risk on supports LatAm FX

October 2, 2017

LatAm pairs stood well behaved (+0.11%).

With information available until 6:30pm Brasilia time


  • The USD strengthened (DXY: +0.60%) as ISM manufacturing rose in September (from 58.8 to 60.8), beating expectations of a decline (consensus: 58.1). However, LatAm pairs stood well behaved (+0.11%). The BRL outperformed EM peers (+0.25% to 3.1546/USD). The MXN also appreciated (+0.13% to 18.2313/USD), like the CLP (+0.05% to 638.79/USD. On the other hand, the COP weakened 0.41% to 2,950/USD as oil fell 2.04%.

  • The front end of the Brazilian curve narrowed on lower inflation expectations and as the BRL strengthened (see Macro Backdrop). In DI futures, the Jan-18 narrowed 3bps to 7.48% and the Jan-19 went down 2bps to 7.24%. Breakevens also fell as the 5-year went down 10bps to 4.72%. 

Macro Backdrop

  • The trade surplus reached USD 5.2 billion in September, slightly above our forecast (USD 4.9 billion) and market consensus (USD 5.0 billion). Over 12 months, the trade surplus increased again to USD 64.9 billion and the year-to-date figure is the highest in the historical series started in 1992. However, the seasonally-adjusted annualized quarterly moving average receded to USD 62 billion, reflecting some moderation of the trade balance at the margin. 

  • September figures again showed discrete moderation in the trade surplus at the margin. Exports, which advanced sharply earlier in the year, have stabilized at a lower level, in line with lower international commodity prices. Despite the recovery seen in recent months, imports also remain at low levels, ensuring stronger trade surpluses in 2017 than in 2016. We maintain our expectation of a large trade surplus this year (USD 62 billion), supported by the robust year-to-date result. Full Report

  • Macro Vision: how the TLP can impact monetary policy. In this report, we estimate that, when fully implemented, the new long-term interest rate (TLP) will allow a reduction of about 2.2 p.p. in the benchmark Selic interest rate, ceteris paribus. The TLP should also contribute to substantially boost the Selic rate’s influence on the economy: we estimated that the Selic rate impact on average interest rate can increase by about 50%. Full Report

  • Orange Book: recovery becoming widespread. The improvement in economic activity data is becoming more widespread, and we have recently revised this year’s GDP growth forecast to 0.8% from 0.3%. For 2018, we expect 2.7% growth. The unsustainable public debt dynamics, however, continues to be the economy’s main vulnerability. Further reforms (especially the changes in the social security system) are a necessary condition for the recovery to be sustainable. Full Report

  • Inflation expectations declined to 2.95% for 2017 and 4.06% for 2018. According to Focus survey, IPCA inflation expectations slightly declined to 2.95% (-2bps) for 2017 and to 4.06% (-2bps) for 2018, and did not change for 2019 (at 4.25%). Also, 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 increased 2bps for 2017 (to 0.70%) and 8bps for 2018 (to 2.38%), and did not change for 2019 (at 2.50%). Finally, the BRL remained flat for 2017 and 2018: at 3.16/USD and 3.30/USD, respectively, and slightly appreciated for 2019 to 3.36/USD (from 3.38/USD). See BCB Report

  • The fiscal deficit continued narrowing in August, right before the government presented the 2018 budget bill (which will mark the end of the 5-year fiscal consolidation plan) and two large earthquakes battered Mexico (posing negative risks on activity and fiscal accounts). Granted, the bulk of the improvement observed in the fiscal accounts throughout 2017 is attributable to the massive MXN 322 billion (1.5% of GDP) dividend received from Banxico in March (the outcome of exchange rate gains on international reserves during the previous year). However, Mexico’s fiscal deficit indicators are narrowing beyond the windfall effects of the dividends. In fact, even if 70% of the amount of the dividends received is excluded (as the remaining 30% is directed to stabilization/sovereign funds, and therefore recorded as both revenues and expenditures), the 12-month rolling primary balance reached a MXN 91 billion surplus (0.4% of GDP) in August, from a MXN 52 billion surplus in July. Likewise, using the same metric (ex-dividend), the 12-month nominal fiscal deficit narrowed to MXN 421 billion (2% of GDP), from MXN 452 billion in July, and the public sector borrowing requirements (broadest deficit indicator) narrowed to MXN 501 billion (2.4% of GDP), from MXN 534 billion previously.

  • We see a substantial improvement of fiscal accounts in 2017, and expect fiscal consolidation to be carried on into 2018 (albeit with smaller budget cuts, in the midst of the electoral year). The 2018 budget bill presented to Congress in early September already shows that the government is planning to cut budget expenditures by much less (0.4 p.p. of GDP) than in the previous two budgets (1.2 p.p. of GDP in 2016, and 1.1 p.p. of GDP in 2017). In any case, this would still be sufficient to decrease the public-debt-to-GDP ratios in 2018 (and thereafter), as the government would achieve its long-term target for the public sector borrowing requirements (2.5% of GDP, from 4.6% of GDP in 2014); that is, the level that the Ministry of Finance considers enough to stabilize public-debt-to-GDP dynamics. In the short-term, the earthquakes – which disrupted activity in six states that together account for one third of the economy – could hurt GDP growth (denting revenues) and put pressure on spending (in the form of reconstruction works and financial aid). Last week, however, the Finance Minister, José Antonio Meade, told the press that the earthquakes will not compromise the fiscal consolidation. Full Report

  • Banxico published September’s expectations survey, which shows a slight increase of inflation expectations. Even though the recent hurricanes and earthquakes put upward risks on inflation, the decline of annual inflation (to 6.5% in the first half of September, from 6.7% in the second of August) seems to have reduced these concerns. In fact, the latest Banxico survey only shows a slight increase of median inflation expectations for some tenors; 2017 (to 6.30%, from 6.25%) and average of next 5-8 years (longest tenor, to 3.45%, from 3.40%). Median inflation expectations for the next 12-months (3.81%, from 3.82%) and 2018 (3.79%, from 3.80%) were broadly unchanged. Turning to the exchange rate, median USDMXN expectations decreased for year-end 2017 (18.05, 18.20 previously) and increased slightly for 2018 (18.15, 18.11 previously). The MXN depreciated 2.9% in September, but mostly in the last week of the month, so it is possible that the survey is still not incorporating this event into expectations. The main driver of the depreciation has been the increase of U.S. treasury yields, which increased in response to the U.S. Fed’s guidance on balance sheet normalization (set to begin in October) and the announcement of President Trump’s tax reform (which aims at decreasing the corporate income tax rate, to 20% from 35%). Both of these developments put upward pressure on U.S. interest rates; the rolling-off of U.S. treasuries and MBS from the Fed’s balance sheet implies less demand for these securities (hence lower bond prices and higher yields), while tax cuts are conducive to an expansion of aggregate demand and, thus, higher yields. Regarding activity, median GDP growth expectations decreased, for 2017 (2.10%, from 2.15%), 2018 (2.3%, from 2.4%), and the average of the next 10 years (2.7%, from 2.8%). Finally, on monetary policy, median expectations show that most market participants believe Banxico will leave the policy rate at its current level for the rest of 2017 (7%, unchanged) and cut rates in 2018 (to 6.5%, from a previous median expectation of 6.75%). As per September’s survey, the first 25bp cut would come in 3Q18, and the second in 4Q18.  

Market Developments 

  • GLOBAL MARKETS: Risk on day with receded volatility gauges (VIX: to 9.50 – close to historical lows), higher equity markets and a stronger USD, amid solid US data. The manufacturing ISM rose more than expected in September (from 58.8 to 60.8 – the highest headline print in 13 years). Global Markets Tracker

  • CURRENCIES & COMMODITIES: Commodities were strong on the red (CRB futures: -1.19%). In energy, oil prices dropped (WTI: -2.04% to 50.89/USD). Likewise, soybean fell 1.14% and corn weakened 1.06%. In metals, iron ore fell 1.38%.  Despite the strong dollar session (DXY: +0.60%), some LatAm currencies posted gains. The BRL outperformed EM peers (+0.25% to 3.1546/USD). The MXN also appreciated (+0.13% to 18.2313/USD), like the CLP (+0.05% to 638.79/USD. On the other hand, the COP weakened 0.41% to 2,950/USD as oil fell 2.04%. FX & Commodities Tracker

  • CDS SPREADS & EXTERNAL BONDS: LatAm Credit spreads (5-year) narrowed in the session. In Brazil, Mexico and Colombia, CDS fell 3bps to 193bps, 107bps and 119bps, respectively. In Chile, country risk inched down 1bp to 58bps. External Bonds and CDS Tracker

  • LOCAL RATES – Brazil: The front end of the Brazilian curve narrowed on lower inflation expectations and as the BRL strengthened (see Macro Backdrop). In DI futures, the Jan-18 narrowed 3bps to 7.48% and the Jan-19 went down 2bps to 7.24%. Breakevens also fell as the 5-year went down 10bps to 4.72%. Brazil Rates Tracker

  • LOCAL RATES - Mexico: Long Mexican yields widened, tracking higher US Treasuries. In TIIE swaps, the 1-year went up 1bp to 7.29% and the 5-year increased 2bps to 6.82%. Mexico Rates Tracker

  • LOCAL RATES – Chile and Colombia: The Chilean curve steepened in the session. In Camara swaps, while short yields (until 9-month) inched down 1bp, longer ones widened 2-4bps. Chile Rates Tracker In Colombia, short IBR swaps widened 4bps whereas long rates were mixed. Colombia Rates Tracker

Upcoming Events

  • In Brazil, inflation and activity releases are the highlights. We project September’s IPCA consumer inflation (Fri.) to register a 0.10% monthly increase, with year-over-year inflation stable at 2.5%. On economic activity, August’s industrial production will be released (Tue.) and we expect a 0.7% sa. decline, following 4 consecutive monthly increases. In addition, September’s coincident indicators will be released: Fenabrave’s vehicle sales (date not yet specified) and Anfavea’s auto production (Thu.). Finally, the second round of corruption charges against President Temer is going to be discussed in the Constitution and Justice Committee (CCJ) as the president presents his defense. 
  • In Chile, all eyes on the minutes of the September monetary policy meeting (Tue.). We expect the minutes to reveal a divided board once again, with a minority calling for additional easing. Also on Tuesday, the national statistics agency (INE) will publish the private consumption activity indicators for August (Tue.). We expect the commercial activity index to have increased 4.1% from last year. BCCh will publish the GDP proxy (Imacec) for the month of August (Thu.). We expect the GDP proxy IMACEC to grow 0.5% sa from July, leading annual growth of 2.1% (2.8% in June). Later on Thursday, INE will publish nominal wage growth for August. INE will also publish inflation for the month of September (Fri.). In August, consumer prices expanded 0.2% month over month, so annual inflation came in at 1.9%, below the 2- 4% tolerance range. We expect consumer prices to have gained and atypically low 0.2% from August, leading to an annual inflation of 1.9% in the month.
  • In Colombia, the National Institute of Statistics will release the September inflation print (Thu.). We expect consumer prices to gain 0.18% from August, taking annual inflation above the target range to 4.12%.
  • In Mexico, the statistics institute (INEGI) will publish July’s gross fixed investment (Wed.). We estimate that gross fixed investment contracted 0.9% year-over-year.
  • In Argentina, the BCRA will release its monthly expectation survey (Tue.). Finally, the car-makers association (ADEFA) will release September data on production, exports and domestic sales to car dealers (Wed.).

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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