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LatAm assets under pressure as US Senate passes budget proposal

October 20, 2017

In FX, the USD strengthened across the board (DXY: +0.44%) after the US Senate approved a budget resolution on Thursday.

With information available until 6:30pm Brasilia time

Highlights

  • In FX, the USD strengthened across the board (DXY: +0.44%) after the US Senate approved a budget resolution on Thursday, increasing market expectations of a tax reform. The regional laggard was the MXN, trading at 18.9989/USD (-1.02%). The CLP depreciated 0.60% to 629.04/USD and the COP weakened 0.62% to 2,937/USD. Finally, the BRL closed at 3.1938/USD (-0.72%). 
  • In rates, LatAm yields widened on the back of rising US Treasuries. In Brazil, long DI futures widened 2-4bps. The Mexican curve bear steepened (1s10s: +5bps). Andean rates were also pressured (10-year IBR swap: +3bps to 6.11%; 10-year Camara swap: +1bp to 4.20%). 

Macro Backdrop

BRAZIL

  • Copom Cockpit: gradual slowdown. According to recent communication from the monetary authority, we expect the Copom to reduce the easing pace to 0.75pp, which would represent a moderate pace reduction from the 1.00pp cuts implemented in the last four meetings. This decision would be consistent with the committee's recent signaling, considering the evolution within expectations of the baseline scenario and the current stage of the easing cycle. In the post-meeting statement, we expect the committee will continue signaling the continuity of the easing cycle and further reduction of the easing pace at the December meeting, if the conditions described in the baseline scenario are maintained. Full Report
  • IPCA-15 climbed 0.34% in October, in line with expectations. The result virtually matched our estimate and the median of market expectations (both at 0.35%). The index rose 0.11% in the previous month and 0.19% in October 2016. The IPCA-15 is up by 2.25% year-to-date, the lowest result for the period since 2006, according to census bureau IBGE (and down substantially from 6.11% in the year-earlier period). The year-over-year change picked up to 2.71% (from 2.56% in September). Breaking down by product groups, the largest upward contributions during the month came from transportation (0.11 p.p.) and housing (0.10 p.p.). On the opposite end, food and beverages (-0.04 p.p.) and household items (-0.01 p.p.) provided negative contributions. October marked the fifth consecutive month of deflation in the food group. 
  • Based on the IPCA-15 report and other current information, our preliminary forecast for the headline IPCA in October is 0.48%, lifting the year-over-year change to 2.8%. The largest upward contribution to the IPCA will come from the housing group (0.20 p.p.), pressured by bottled cooking gas and electricity tariffs. The food group is likely to post a positive result after five months of deflation. Full Report
CHILE
  • As widely expected by the market, the BCCh held the policy rate at 2.5% in October. However, building on the downside inflation surprise in September, the press release now includes an easing bias. This means the probability that additional easing occurs in the short-term has increased, and the likelihood of this event will hinge on incoming inflation prints. The central bank sees inflation in the short-term below expectations, which could affect the trajectory to the 3% target over the relevant 2-year horizon. Hence, the evolution of inflation will receive special focus and ultimately determine whether a looser monetary policy is required. Meanwhile, the board is content that activity is unfolding as outlined in the IPoM. 
  • We still see the board leaving the policy rate at 2.5% for an extended period as our base case. This is in line with our expectation of a 0.2%-0.3% October monthly inflation (0.2% one year ago; -0.2% in September). Nevertheless, a strong CLP and inertia from indexation mechanisms will keep the balance of risks for inflation tilted to the downside. Hence, new rate cuts will likely come if additional downside inflation surprises materialize. Full Report
Market Developments 
  • GLOBAL MARKETS: US Treasuries sold off (5-year: +6bps to 2.02%) and the USD strengthened across the board after the US Senate approved a budget resolution – by 51 votes in favor and 49 against - allowing for US$1.5 trillion in tax cuts and now moves to discuss the tax bill itself. Equity markets were on the green and volatility gauges decreased. Global Markets Tracker
  • CURRENCIES & COMMODITIES: In Commodities space, oil prices increased (WTI: +0.83% to 51.94/USD). On the other hand, agriculture commodities posted losses (wheat: -1.56%; sugar: -0.92%). On a strong dollar day (DXY: +0.44%), LatAm currencies posted losses. The regional laggard was the MXN, trading at 18.9989/USD (-1.02%). Then, the CLP depreciated 0.60% to 629.04/USD and the COP weakened 0.62% to 2,937/USD. Finally, the BRL closed at 3.1938/USD (-0.72%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads (5-year) traded range bound in the session. In Brazil, Chile and Colombia, spreads were stable at 171bps, 54bps and 112bps, respectively. In Mexico, however, CDS inched up 1bp to 106bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Long Brazilian yields widened on rising core yields. The Jan-21 increased 4bps to 8.87% and the Jan-25 went up 3bps to 9.85%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: The Mexican curve bear steepened amid the global risk on after the US senate approved the budget resolution. The 1-year increased 3bps to 7.49% and the 10-year widened 8bps to 7.38%. Real rates also went north (Dec-25: +3bps to 3.19%). Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: Short and long Chilean yields inched up in the session. In Camara swaps, the 10-year increased 1bp to 4.20%. Chile Rates Tracker In Colombia, long IBR swaps widened 3-4bps, tracking US treasuries (10-year: +3bps to 6.11%). 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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