Itaú BBA - LatAm FX depreciate on weak Chinese trade data

Latam FI Strategy Daily

< Back

LatAm FX depreciate on weak Chinese trade data

May 8, 2017

Metals and grains posted losses as Chinese imports slowed down.

With information available until 6:30pm Brasilia time


  • Metals and grains posted losses as Chinese imports slowed down. Hence, LatAm currencies depreciated in tandem with commodity-linked FX (-0.64%). On the back of lower copper prices, the CLP posted losses of 0.90% to 678.21/USD. The COP weakened 0.40% to 2,960.99/USD and the BRL depreciated 0.64% to 3.1981/USD. Finally, the MXN was the regional laggard, trading 1.14% lower to 19.21/USD. Idiosyncratic factors played a role, as recent polls show a tight race in the upcoming regional elections (June 4).
  • Over the weekend, Macron won the election and became the new French President. Equity markets didn’t seem to react as such outcome was broadly anticipated. Going forward, the general view is that the scenario for Europe as a whole has improved and market political concerns take a back seat for a while. Hence, implied volatility gauges fell as the VIX tested pre-subprime crisis lows. 

Macro Backdrop

  • Inflation expectations for 2017 ticked down, while 2018 expectations increased. According to BCB’s Focus survey, inflation expectations for 2017 declined to 4.01% (-2bps), and 2018 expectations surged to 4.39% (+9bps). 2019 expectations remained below the BCB’s target at 9.25%. Year-end Selic expectations stood flat at 8.50% for 2017, 2018 and 2019. BRL expectations oscillated slightly as the market sees the currency at 3.40/USD by YE18 (previous: 3.38/USD) and at 3.45/USD by YE19 (previous: 3.47%). Also, 2017 GDP growth expectations inched up to 0.47% from 0.46%. BCB Report
  • The Serasa Experian Index for Retail Activity fell 0.2% mom s.a. in April (official seasonal adjustment), following a 0.6% gain in the previous month. The breakdown shows increases in construction material (0.9%), apparel (2%) and “autos & parts” (2.6%), and decreases in “supermarket, food and drinks” (-3.7%), furniture (-1.2%) and “fuel and lubricants” (-3.7%). Combining with other indicators, our preliminary forecasts for April core and broad retail sales stand at -1.3% and +0.2% mom s.a., respectively. The divergence is explained by other indicators and by differences in weights and price indexes between Serasa’s index and official data. Our final forecasts will be out after the release of the official March retail sales (to be released May 11 – we forecast core falling 0.5% mom s.a. and broad retail sales declining  0.8% mom s.a.) and April’s supermarket sales (ABRAS, to be released after mid-May).
  • Consumer confidence continued recovering in April, after hitting a historical low in the beginning of the year (at the height of Trump’s anti-trade rhetoric and the spike of gasoline prices). The consumer confidence index came in at 83.8 in April, above market expectations (82.5), with the 3-month moving average down by 9.9% y/y (from -16.7% y/y in March). This moderate recovery is also visible at the margin, as seasonally-adjusted consumer confidence increased to 84.3 (from 81.2 in March). Notably, the more constructive dialogue between US and Mexico policymakers has moderated the uncertainty about economic prospects, and the strength of employment growth is benefitting consumers. The acceleration of inflation, however, is negative for sentiment. 
  • Low consumer confidence is currently decoupled from resilient private consumption. April's consumer confidence level is still low (84, not far from the average of 2009, 81, when Mexico was in a deep recession). Yet, private consumption remains strong, in spite of the shocks. Both the monthly private consumption indicator (6.4% qoq/saar in February, up from 5.4% in January) and services sector growth (4.1% qoq/saar in 1Q17, according to the flash estimate) reflect this strength. Although we expect weaker private consumption down the road, due to weaker fundamentals (negative real wage growth, low confidence, higher domestic rates curbing credit growth, among others), the risks are for a more moderate slowdown than we were previously expecting. 
  • April’s consumer price inflation came in line with market expectations, with tradable prices continuing to transmit downward pressure. Prices increased 0.2% from March to April – in line with our call and market consensus – yet below the 0.3% the gain recorded one year ago. Inflation remained below the center of the 2%-4% tolerance range for the seventh consecutive month. Prices in the month were lifted by the 0.5% seasonally-linked increase in food and non-alcoholic beverages (accounting for +0.11 percentage points of the headline monthly variation). For a similar reason, interurban transportation prices increased 9.3% from March, contributing 0.05 p.p. to the headline variation. Annual inflation was stable at 2.7%, continuing to represent no major concern for the central bank, although service inflation came in somewhat more unfavorable. Tradable inflation slowed to 2.0% y/y from 2.3% (supported by lower energy inflation); meanwhile, non-tradable inflation ticked up to 3.5% y/y (3.3% previously).
  • We expect inflation to stay low for the remainder of the year. We continue to see inflation ending the year at 2.8% (2.7% in 2016) and to be at the 3% target by year-end 2018. The low inflation will likely result some additional monetary easing ahead. We see the policy rate at 2.5% by yearend (currently 2.75%). Full Report
  • Chile continues to maintain a comfortable trade surplus, although it continues to edge down. The USD 507 million surplus in April (USD 482 million market consensus; our forecast: USD 600 million), comes as non-mining exports weakened, while copper exports gradually recover following the end of an extensive copper mine strike in February and March. The trade surplus in April is below the USD 805 million one year prior, leading to the rolling 12-month trade surplus narrowing to USD 4.1 billion, compared to the USD 5.3 billion in 2016. Regardless, this still reflects low external vulnerabilities. Our seasonally adjusted series shows that, at the margin, the trade balance dropped to a USD 150 million trade deficit (annualized) in the quarter ending April, from the USD 6.9 billion surplus recorded in 4Q16. Copper exports grew 3.3% year over year, following the 12.2% and 2.4% declines in February and March, respectively. Nevertheless, total exports decreased 0.9% year over year (+6.2% in March), with both industrial and agricultural sales contracting. Meanwhile, total imports growth slowed to 5.9% year over year in April (11.3% in March) as capital goods imports magnified its fall (to -11.4% from -9.1% in March).
  • We expect mining exports to recover ahead as copper export volumes rebound and prices will be, on average, above last year’s level. In turn, internal demand will likely remain weak this year and result in the current account deficit staying comfortably low. We estimate a current-account deficit of 1.2% of GDP recorded (1.4% last year). Full Report
  • Consumer prices gained 0.47% from March to April (0.50% in April 2016) and surprised the market’s 0.38% forecast and our 0.37% call to the upside. The main factors behind the upside surprise were the 0.67% rise in housing inflation (we expected 0.3%; -0.14% one year ago) and the 1.0% increase in transports prices (vs. our 0.7% expectation and 0.46% in April 2016). Food inflation continued to moderate in April, but the disinflation process came to a halt as regulated price inflation surprised to the upside. Food inflation dropped to its lowest level in three years as the unwinding of the impact from the El Niño weather phenomenon continues. Nevertheless, headline inflation was broadly stable at 4.66% (4.69% in March) as regulated energy, transport and water services all accelerated. Finance Minister Cardenas told local media that the April data showed an abnormal behavior of regulated prices and a commission is to investigate why this is happening.  However, if food and regulated prices are excluded, inflation fell only modestly, with the tradable component reaching 5.35% (5.59% in the previous month), while non-tradable inflation was 5.22% (from 5.33%). 
  • We see inflation declining to 4.1% by yearend (5.8% for 2016). With the loosening labor market, depressed confidence and still high interest rates, we expect demand-side inflationary pressure to decline ahead. However, last month’s deterioration of inflation dynamics will likely lead to a more cautious central bank for the time being. Full Report
Market Developments 
  • GLOBAL MARKETS: Over the weekend, Macron won the election with 66% vs. 34% for Le Pen and became the new French President. Assets didn’t seem to react as such event was basically fully priced in. Going forward, the view is that the scenario for Europe as a whole has improved and the political agenda takes the back seat for a while. Hence, volatility gauges fell as the VIX fell to a 10-year low. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities posted losses as Chinese trade data moderates. Metals traded lower (iron ore: -2.35%, copper: -1.50%) and soyben prices fell 0.85%. Oil prices increased (Brent: +0.63% to USD 49.41/USD) bolstered by statements from major oil-producing countries signaled that Opec and non-Opec supply cuts could be extended into 2018. Khalid al-Falih, Saudi Arabia’s energy minister, stated in an event that “the producer coalition is determined to do whatever it takes to achieve our target of bringing stock levels back to the five-year average”. Outside Opec, Russia also appears to be backing an extension (which is expected to be agreed at the next Opec ministerial meeting on May 25) as the energy minister Alexander Novak said “we are discussing a number of scenarios and believe extension for a longer period will help speed up market rebalancing”. In LatAm FX, all currencies under our coverage depreciated. On the back of lower copper prices, the CLP posted losses of 0.90% to 678.21/USD. The COP weakened 0.40% to 2,960.99/USD and the BRL depreciated 0.64% to 3.1981/USD. Finally, the MXN was the regional laggard, trading 1.14% lower to 19.21/USD. Idiosyncratic factors played a role, as recent polls show a tight race in the upcoming regional elections (June 4). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Credit spreads for the 5-year tenor widened all across LatAm. CDS in Chile inched up 1bp to 75bps. Then, Brazilian spreads went up 2bps to 215bps and Colombian increased 3bps to 132bps. Country risk in Mexico widened the most, to 121bps (+4bps). External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Brazilian yields were mixed in the session.  In DI futures, the very front widened (Jan-18: +2bps to 9.41%), the belly narrowed (Jan-19: -1bp to 9.28%) and very long inched up (Jan-25: +1bp to 10.38%). Brazil Rates Tracker
  • LOCAL RATES - Mexico: The Mexican curve bear steepened as consumer confidence came in stronger-than-expected (see Macro Backdrop). In TIIE swaps, while the 9-month inched up 1bp to 7.25%, the 10-year went up 4bps to 7.52%. Accordingly, breakevens widened as the 5-year went up to 4.00% (+3bps). Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, yields traded higher in the session as the market trimmed easing expectations after BCCh’s Vice President Sebastian Claro stated that “going beyond a rate of 2.5% would require a deviation from the base scenario that is not observed today”. In Camara swaps, the 1-year widened 3bps to 2.58% and the 5-year also increased 3bps to 3.46%. Chile Rates Tracker In Colombia, the very front fell and long widened again. In IBR Swaps, while the 1-year inched down 1bp to 5.28%, the 10-year increased 3bps to 5.92%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, the Social Security reform’s president in the Special Committee, Carlos Marun (PMDB), scheduled a voting session on amendments to the proposal’s base text, which was approved earlier this week, to Tuesday (May 9) starting 9:30 AM (SP time). The next step is the vote in the Lower House plenary, scheduled for the second half of May. Then, IPCA consumer inflation for April will be released (Wed.). We forecast a 0.15% monthly rise, with year-over-year inflation decelerating to 4.1% from 4.6%. Moreover, the key releases on economic activity will be March’s retail sales figures (Thu.) and the Service Sector Survey (PMS) (Fri.). We forecast a 0.5% setback in core sales (month-over-month, seasonally adjusted), whereas the broad segment, which include vehicle sales and construction material, will likely decline 0.8% month-over-month. Moreover, IBGE will release the monthly update of its Systematic Survey of Agricultural Production (Thu.). Finally, traffic of heavy vehicles (ABCR) and paper cardboard dispatches (ABPO) for April, two relevant coincident indicators for industrial production, may be released. 
  • In Mexico, the statistics institute (INEGI) will announce April’s CPI inflation (Tue.). We expect a 0% month-over-month variation. Assuming our forecast is correct, headline inflation would rise from 5.35% year-over-year in March to 5.69% year-over-year in April. Then, the National Association of Department Stores and Supermarkets (ANTAD) will announce April’s same-store-sales (Wed.). We expect ANTAD sales to grow at a weak 2.5% year-over-year (from 4% in March). Finally, the statistics institute (INEGI) will publish March’s industrial production (Fri.). We expect a 1% year-over-year expansion (up from a 1.7% contraction recorded in February), helped by a positive calendar effect (from the Easter holidays, which last year took place in March). 
  • In Colombia, the monetary policy meeting minutes from April will be published (Fri.). At the meeting, the central bank once again surprised the market by implementing a larger than expected 50-bp rate cut, to 6.5%. The minutes will provide more indication on the thought process behind the more aggressive rate cut and what conditions will determine the pace of future rate cuts. Then, activity indicators for the month of March will be published (Fri.). In the month of February, activity indicators came in notably frail, consolidating activity’s weak footing at the start of the year. We expect industrial production to increase 2.2% year over year (-3.2% in February). Meanwhile, retail sales are likely to rise 2.0% in twelve months (-7.2% previously), as car sales improved.

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa

< Back