Itaú BBA - LatAm FX end the week on a high note

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LatAm FX end the week on a high note

August 18, 2017

LatAm currencies (+0.70%) posted gains on the back of stronger commodities (CRB futures: +0.92%) and the weaker USD (DXY: -0.23%).

With information available until 6:30pm Brasilia time

Highlights

  • LatAm currencies (+0.70%) posted gains on the back of stronger commodities (CRB futures: +0.92%) and the weaker USD (DXY: -0.23%). The BRL outperformed within high-beta space, closing at 3.1472/USD (+0.89%). The MXN (+0.78% to 17.7107/USD) appreciated as oil prices climbed (+3.43%). Meanwhile, Andean pairs were broadly stable (COP: +0.09% to 2,988/USD; CLP: -0.08% to 646.45/USD). 
  • The Brazilian curve bull flattened (Jan19x25: -6bps) on profit taking. In DI futures, the Jan-18 fell 6bps to 8.06% and the Jan-21 narrowed 10bps to 9.42%. Breakevens also narrowed (5-year: -2bps to 4.90%). 
Macro Backdrop

CHILE
  • Despite the improvement from 1Q17, activity in 1H17 confirms the economy remains weak. Activity expanded 0.9% from one year ago, below the 1.0% growth estimated from the monthly GDP proxy (Imacec). Growth in 2Q17 was higher (at 1.3%) after correcting for the unfavorable calendar effect in the quarter, but is still sluggish. Domestic demand picked up from the previous quarter, aided by an improved performance of consumption. Meanwhile, investment and net exports continue to pull activity down. 
  • Although we expect activity to continue recovering throughout the remainder of the year, we have lowered our 2017 GDP forecast to 1.3% (previous: 1.6%). Activity will be favored by firming growth in Chile’s trade partners, higher copper prices, the monetary stimulus applied by the BCCh and low inflation. However, uncertainties linked to the fate of reforms after the presidential elections will continue to weigh negatively on confidence and investment, curbing an activity improvement. Full Report
  • The current account deficit widened in 2Q17, as mining export volumes remain weak. The deficit came in at USD 1.5 billion in the second quarter of the year, larger than our USD 1.2 billion deficit forecast, the market’s USD 1.3 billion estimate, and the USD 1.0 billion deficit recorded in 2Q16. A weaker trade balance of goods and services, as well as a larger income balance deficit, led the deterioration from 2Q16. The resulting rolling-4Q current account deficit rose to USD 5.6 billion (2.2% of GDP), from USD 3.6 billion in 2016 (1.4% of GDP). Our own seasonal adjustment shows the current account deficit moderated at the margin to 3.0% of GDP (from 3.4% in 1Q17). Foreign direct investment recorded an outflow of USD 0.3 billion, the worst quarterly direct investment on record, and down from the USD 2.7 billion investment in 2Q16.
  • We expect the current account deficit to retreat in the remainder of the year as internal demand stays weak, the effects of mining strike continue to fade, and copper prices remain high. Hence, we see the current account deficit around the 1.4% recorded in 2016. However, the most recent balance-of-payments data pose the risk of a higher deficit. Full Report

COLOMBIA

  • Banrep general manager Juan José Echavarría’s presentation of the 2Q Inflation Report reinforced the views recently presented by different board members on the Colombian economy. Activity has been unsatisfactory and growth this year will likely be between 1.6%-1.8% (previous: 1.8%). Echavarría noted that consumer spending remains very depressed, but highlighted that consumer confidence is becoming less pessimistic. A growth recovery to between 2.5% and 3.0% is expected for next year. Additionally, Echavarría sees Colombia’s potential growth at 3.3% (broadly in line with Itaú). 
  • We see the final cut of the year at this month’s meeting (to 5.25%). However, given the policy rate remains contractionary and inflationary pressures will fade ahead, we see scope for additional rate cuts. Echavarria said the neutral real rate is close to 1.4%, implying a neutral nominal rate around 4.5% (using the 3% inflation target). We see the policy rate being lowered to the nominal neutral rate of 4.5% in 2018. Full Report Below
Market Developments 
  • GLOBAL MARKETS: Volatility gauges decreased from recent highs and European equity markets were on the red. Global Markets Tracker
  • CURRENCIES & COMMODITIES: WTI increased 3.43% to USD 48.86/USD as Baker Hughes’ data showed the US oil rig count fell this week. LatAm FX (+0.69%) posted gains on the back of stronger commodities (CRB futures: +0.92%) and the weaker USD (DXY: -0.23%). The BRL outperformed within high-beta space, closing at 3.1472/USD (+0.89%). The MXN (+0.78% to 17.7107/USD) appreciated as oil prices climbed (+3.43%). Meanwhile, Andean pairs were broadly stable (COP: +0.09% to 2,988/USD; CLP: -0.08% to 646.45/USD). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: In Brazil, the 5-year CDS narrowed 4bps to 203bps. Chilean, Mexican and Colombian spreads fell 2bps to 61bps, 108bps and 131bps, respectively. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve bull flattened (Jan19x25: -6bps) on profit taking. In DI futures, the Jan-18 fell 6bps to 8.06% and the Jan-21 narrowed 10bps to 9.42%. Breakevens also narrowed (5-year: -2bps to 4.90%). Brazil Rates Tracker
  • LOCAL RATES - Mexico: Long Mexican yields narrowed 1-2bps. In TIIE swaps, the 10-year fell 2bps to 7.12%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, long nominals inched down 1bp. In Camara swaps, the 10-year inched down 1bp to 4.07%. Chile Rates Tracker   Colombian rates were mixed in the session. In IBR swaps, the 1-year fell 2bps to 4.93% and the 10-year fell 1bp to 6.32%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, August’s IPCA-15 consumer inflation preview will be released (Wed.). We forecast a 0.40% monthly increase, with year-over-year inflation slowing to 2.7% from 2.8%. Also, the TLP (new Long Term Interest Rate) report can be voted by Tuesday in the joint commission (Lower House and Senate), built to discuss this topic. Moreover, July’s tax collection may also be released next week, for which we forecast BRL 108.3 billion. On the economic activity front, FGV will release its industrial business confidence preview for August (Tue.). We expect a 1.0% mom s.a. increase. Still, retail and consumer monthly surveys for August, also from FGV, will be released (Fri.). Onto the balance of payments report (Wed.), we expect a USD 3.5 billion current account deficit and direct investment in the country (DIC) to register inflows of USD 5.5 billion in July. 
  • In Mexico, the statistics institute (INEGI) will publish Q2’s GDP growth (Tue.). We expect it to post a 1.7% year-over-year growth. Also, INEGI will publish (Tue.) June’s monthly GDP proxy (IGAE), which we forecast at 2.7% year-over-year. Moreover, INEGI will announce June’s retail sales (Wed.). We estimate that retail sales slowed down to 2.5% year-over-year. Moving forward, INEGI will publish CPI inflation figures for the first half of August (Thu.). We expect bi-weekly inflation at 0.25%. Then, Banxico will publish the minutes of the latest monetary policy meeting (Thu.). Finally, INEGI will announce July’s unemployment rate (Fri.). We expect the unemployment rate to post 3.4%. Shortly after, Banxico will publish 2Q’s current account balance. We expect the current account deficit to come in at USD 3,800 million. 
  • In Colombia, think-tank Fedesarrollo will release the July Industrial and Retail confidence (Thu.). We expect confidence levels to remain low in the months ahead as an activity recovery is not imminent. 
  • In Argentina, the central bank will hold its biweekly monetary policy meeting, to decide on the reference rate (Tue.). We do not expect changes in the monetary policy rate until 4Q17, after the mid-term elections. Moreover, the INDEC will publish the EMAE (official monthly GDP proxy) for June (Thu.). We expect activity to grow 3.6% year over year in June (+0.6% mom/sa). Then, the IGA (GDP proxy published by OJF consulting firm) for July will see the light (Thu.). Furthermore, the trade balance for July will also come out (Thu.). We expect a trade deficit of USD 50 million.  Finally, Universidad Di Tella will publish its consumer confidence report for August (Thu.). 

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

COLOMBIA – Space to cut rates much narrower

Central bank general manager Juan José Echavarría’s presentation of the 2Q Inflation Report reinforced the views recently presented by different board members on the Colombian economy. Activity has been unsatisfactory and growth this year will likely be between 1.6%-1.8% (1.8% previously; Itaú: 1.6%). Echavarría noted that consumer spending remains very depressed, but highlighted that consumer confidence is becoming less pessimistic. A growth recovery to between 2.5% and 3.0% is expected for next year. Additionally, Echavarría sees Colombia’s potential growth at 3.3% (broadly in line with Itaú).

Meanwhile, the general manager was quick to highlight that there is a long way to get inflation back to the 3% target. He commented that inflation has already reached its low point for the year (3.4%) and will likely climb in 2H17 (given a higher base of comparison). Echavarría said that inflation ending 2017 at 3.9% (Itaú, Central Bank analyst survey: 4.2%) would be good news for the central bank. The target has been for this year’s inflation to be back within the 2%-4% target range. Next year, he sees inflation much nearer to the 3% target. 

Another rate cut likely this month. Since the close of last year, the central bank has lowered the policy rate by 225-bps to 5.5%. Slowing growth and the dilution of supply shocks supported lower rates. Regarding future actions, Echavarría hinted that he sees a 25-bp cut to 5.25% at the meeting later this month (in line with Itaú). However, the general manager also cautioned that the scope for further rate cuts has narrowed a lot, suggesting that the board will soon pause as they wait for inflation to revert to a downward trend early next year. 

We see the final cut of the year at this month’s meeting (to 5.25%). However, given the policy rate remains contractionary and inflationary pressures will fade ahead, we see scope additional rate cuts. Echavarria said the neutral real rate is close to 1.4%, implying a neutral nominal rate around 4.5% (using the 3% inflation target). We see the policy rate being lowered to the nominal neutral rate of 4.5% next year. 

Vittorio Peretti



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