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LatAm FX depreciate after solid US labor market data

March 8, 2017

After strong ADP figure, the market revised to the upside expectations for Friday nonfarm payrolls report

With information available until 6:30pm Brasilia time

Highlights

  • LatAm FX weakened on the back of solid US private sector hiring data. The market revised to the upside expectations for Friday nonfarm payrolls report, after ADP employment came in stronger than the most optimistic estimate. The CLP lost 0.50% to 662.55/USD. The MXN weakened 0.95% to 19.68/USD and the COP traded -1.29% lower to 2,994.38/USD, hurt by the oil rout (WTI: -5.38% to USD 50.28/bbl - lowest level since December 2016). The BRL tested the 3.18/USD handle during the intraday highs, amid market talks that the government would be considering raising the tax on FX transactions (IOF). Later, Finance Minister Meirelles dismissed this information, adding that “there is no decision yet on the IOF tax”. The BRL closed at 3.1704/USD (-1.61%).
  • In Chile, the Camara swaps curve tightened as the CPI data came in a tad below estimates (see Macro Backdrop). Longer term rates (past 3-year) widened 2bps on average (5-year: +3bps to 3.69%). In Brazil, DI futures bear-steepened; the Jan-19 went up 4bps to 9.74% and the Jan-21 increased 10bps to 10.11%. For the full year, the curve sees 287-330bps in rate cuts, pending on the term premium estimate.

Macro Backdrop

BRAZIL
  • January’s industrial production declined slightly. Industrial production slipped 0.1% m/m, close to our forecast (+0.1%) and above market estimates (-0.4%). Compared to January 2016, the indicator was up by 1.4%, marking the first advance since December 2014. On a monthly basis, production declined in 2 out of 4 main economic categories: durable consumer goods (-7.3%) and capital goods (-4.1%). On the positive side, intermediary goods production expanded 0.7%. Semi-durable and non-durable consumer goods production climbed 3.1% to the highest level since November 2015. Coincident indicators (capacity utilization, auto production and shipments of cardboard paper) show mixed signs for February. Our preliminary forecast is a slight increase in industrial output in February. Going forward, continuing monetary easing and falling inventories will fuel a gradual increase in industrial demand. Hence, we maintain our forecast of higher industrial production over the coming months. Full Report
  • Paper cardboard dispatches (ABPO) decreased 2.0% m/m in February. We changed our industrial production forecast to 0.3% m/m seasonally adjusted in February (from 0.6%). Another important coincident (traffic of heavy vehicles – ABCR) will probably be released in the next days.
CHILE
  • February’s CPI came broadly in line with expectations, remaining below the 3% target and enhancing the probability of an interest rate cut next week. Prices increased 0.24% m/m (February 2016: 0.28%), below both our expectations (0.3%) and the consensus’ (0.3%). Consumer prices were partly pulled up by the annual rental adjustment, rising liquefied gas prices and food prices. Meanwhile, the decline in tourism packages helped keep inflation low in the month. The resulting annual inflation inched down to 2.7% (previous: 2.8%), edging closer to the floor of the 2%-4% tolerance range. Overall, we see constrained inflationary pressures going forward, as our diffusion index continues to show roughly the same amount of goods posting inflation above the 3% target than below it. The low levels of headline inflation, core inflation and service inflation are in line with our expectation for monetary policy. We see inflation, and particularly core inflation, languishing near the floor of the target range for a notable period of the year. With activity showing only a modest recovery and a weak labor market (wages continued to slow down in January), domestic inflationary pressures will remain subdued. This, alongside a firmer CLP, supports our view the policy rate will end the year at 2.5% (3.25% currently). Full Report
  • Following four consecutive months of annual improvements, consumer confidence declined from one year ago, dampening expectations that the deterioration of private sentiment had ended. According to Adimark, consumer confidence in the month of February came in at 37.0 points (previous: 39.2), from 37.6 points in the 2016 corresponding period. As a result, total confidence has now completed 33 months in pessimistic territory (50 is neutral). Compared to January 2016, most sub-indexes declined. Those deteriorations were spread among long and short-term economic views. Expectations for current purchases of household goods fell into pessimistic territory (49.8) after briefly surpassing 50 in the previous month. Going forward, the expected loosening of the labor will likely limit any improvement to confidence, meanwhile falling inflation and interest rates could buoy a recovery. Low private sentiment has played a key part behind the extended economic slowdown in Chile. We expect GDP growth of 2.0% this year, a mild recovery from the 1.5% expected for 2016. 

Market Developments 

  • GLOBAL MARKETS: Treasury yields increased on the back of solid US private sector data. The 5-year increased 3bps to 2.08% and the 30-year went up 2bps to 3.14%. ADP employment (298k) came in stronger than the most optimistic estimate, suggesting that higher business confidence may be translating into stronger hiring - which in turn supports consumption growth. As an upshot, the market revised to the upside expectations for Friday nonfarm payrolls data. The Fed funds futures implied probability of a hike next week rose to 100%, from 96% as of March 7. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities traded lower in the session, and EM FX depreciated amid a stronger USD. Oil (WTI: -5.38% to USD 50.28/bbl - lowest level since December 2016) extended losses after the EIA (Energy Information Association) report showed US crude stockpiles rose for the eleventh time and US production reached 1-year high. In LatAm FX, all the currencies under our coverage depreciated. The CLP lost 0.50% to 662.55/USD. The MXN weakened 0.95% to 19.68/USD and the COP traded 1.29% lower to 2,994.38/USD, hurt by the oil rout. The BRL tested the 3.18/USD handle during the intraday highs, amid market talks that the government would be considering raising the tax on FX transactions (IOF). Later, Finance Minister Meirelles dismissed this information, adding that “there is no decision yet on the IOF tax”. The BRL closed at 3.1704/USD (-1.61%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Credit spreads for the 5-year tenor increased all across LatAm. Chilean spreads went up 3bps to 74bps. Both Mexican and Colombian country risk went up 5bps to 135bps and 136bps, respectively. Brazil CDS increased the most in the region, to 231bps (+10bps). External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve bear-steepened. In DI Futures, the Jan-19 went up 4bps to 9.74% and the Jan-21 increased 10bps to 10.11%. For the full year, the curve still sees 287-330bps in rate cuts, pending on the term premium estimate. Breakevens also widened (5-year: +8bps to 4.61%). Brazil Rates Tracker
  • LOCAL RATES - Mexico: The Mexican curve slightly bull flattened. In TIIE swaps, the 3- and 6-month edged 1-2 bps lower, while the long end of the curve widened (10-year: +3bps to 7.72%, 30-year: +5bps to 8.24%). Meanwhile, 1-year and 4-year swaps stood flat at 7.18% and 7.39%, respectively. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, the front end of the Camara swaps curve tightened as the CPI data came in a tad below estimates (see Macro Backdrop). Longer term rates (past 3-year) widened 2bps on average (5-year: +3bps to 3.69%). Chile Rates Tracker In Colombia, IBR swaps had a similar movement. The front end narrowed (1-year: -2bps to 6.16%), and long end widened substantially (10-year: +9bps to 6.58%). Colombia Rates Tracker

Upcoming Events

  • In Brazil, February’s IPCA will come out (Fri.). We forecast a 0.45% m/m rise. In annual terms, inflation will set back to 4.9% from 5.35% in January, further consolidating its downward trend.
  • In Mexico, INEGI will announce February’s CPI inflation (Thu.). We expect a 0.48% m/m variation. Assuming our forecast is correct, headline inflation would rise from 4.72% year-over-year in January to 4.76% year-over-year in February.
  • In Colombia, the monetary policy meeting minutes from February will be published (Fri.). The minutes will likely confirm that the most likely scenario has the policy rate falling in coming months, but the timing will be data dependent.

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa



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