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LatAm FX rally amid another US CPI miss

July 14, 2017

The USD weakened across the board and the VIX fell back to 24-year lows.

With information available until 6:30pm Brasilia time


  • The USD weakened across the board and the VIX fell back to 24-year lows after another downside inflation surprise and soft retail sales in the US. In June, core CPI came in at 0.1%, below market consensus (0.2%). Despite another disappointingly soft core CPI, there were signs of firmer trends in services (ex-airlines), which ought to further improve with stronger wage inflation ahead. 
  • LatAm FX posted gains in the session. The MXN is trading 0.68% stronger to 17.5640/USD. The CLP appreciated 0.50% to 657.41/USD and the COP posted gains of 0.57% to 3,028/USD. At last, the BRL outperformed its peers, closing at 3.1796/USD (+1.01%). 

Macro Backdrop

  • According to FIESP, Sao Paulo state industry employment fell 0.17% mom/sa in June, with a destruction of 9500 jobs. Along with other economic activity data, we forecast a destruction of 12.8k formal jobs (CAGED) in June (-30k in seasonally adjusted terms). The 3-month moving average will improve to -23k from -41k. 
  • According to BCB, the IBC-Br activity index fell 0.5% mom/sa in May. The result came below market expectations (0.2%) and our forecasts (0.1%). Relative to the same month in 2016, the IBC-Br rose 1.4%. Meanwhile, the result for April 2017 has been revised upward slightly (+0.1 p.p.). Assuming a stable figure in June, the index would decline 0.1% qoq/s/a in 2Q17, consistent with our GDP forecast for the quarter (-0.2% qoq/sa). 
  • The BCB placed the full offering of 8,300 FX swaps. After closing, the central bank announced another roll over auction of up to 8,300 contracts (USD 415 million) on July 17. 


  • The central bank’s June monetary policy meeting minutes show all board members agreed that activity is deteriorating by more than expected. Slowing credit growth was also flagged as an area of concern. There is also consensus that, although inflation is falling, core measures remain above the range around the target. In this context, the board sees room to leave monetary policy less tight. However, the board remains divided with this being the eighth consecutive split decision. The four-member majority that opted for a 50-bp rate cut thinks the activity deterioration and low growth expectations call for a faster stimulus. The minority group (three board members) in the board agreed that further lowering of the policy rate was necessary given the poor activity performance. However, the uncertainty from the technical staff over what interest rate path is consistent with achieving the 3% inflation target in 2018 supports the case for a more gradual approach (25-bp). 
  • Although the minutes do not clearly indicate the tightening cycle is about to end, we expect the central bank to cut the policy rate twice more this year (25-bps in each of the next two meetings), in a context of low growth and sticky inflation. The central bank will likely make use of the “window of opportunity” provided by the base effects of inflation (as August CPI will likely show a year-over-year acceleration). Our policy rate forecast for the end of this year (5.25%) is in line with the guidance recently provided by Governor Echavarría. Additionally, two of the board members most in favor of lowering the policy rate - finance minister Mauricio Cárdenas and José Antonio Ocampo - also recently noted there is a narrowing margin for further rate cuts. Full Report
  • Activity indicators came in below expectations and confirm activity in the second quarter of the year will continue to show weakness. In May, retail sales contracted 0.5% year over year (-2.0% in April), below market consensus of +1.2% and our +1.4% forecast. Car and motorcycle sales (+3.0% year over year), household appliances (4.5%) and food and non-alcoholic beverage sales (+2.6%) limited the overall retail sales decline (-0.5%) in the month. Meanwhile, the main drag in May came from vehicle spare part sales (-4.4% and -0.4pp contribution the overall decline). A meaningful consumption recovery ahead is unlikely as consumer confidence has remained deeply entrenched in pessimistic territory. 
  • Meanwhile, industrial production fell 0.6% year over year (-6.8% in April). In spite of having one additional working day, the figure came in below the +1.2% market consensus and our +2.0% forecast. The annual fall in industrial production was led by the 8.0% drop in clothing production, while the 9.8% rise in paper manufacturing limited the decline. Once adjusted for calendar effects, industrial production performed poorly in the month with a 1.1% contraction (+2.0% in April). At the margin, industrial production declined by 3.1% qoq/saar, more moderate than the 6.8% drop in 1Q17. We note that a strike in a port in Buenaventura during the month and which extended into June could partly explain the weak headline figures as imports of machinery and equipment were affected. The continued weak activity evolution poses a downside risk to our 1.6% growth forecast for this year (2.0% in 2016). Full Report
Market Developments 
  • GLOBAL MARKETS: US treasuries narrowed (5-year:-3bps to 1.86%) and the dollar depreciated vis-à-vis G10 after another downside inflation surprise and soft retail sales. In June, core CPI came in at 0.1%, below market consensus (0.2%) and headline retail sales fell (-0.2%) below consensus expectations for a modest increase (+0.1%). Despite another disappointingly soft core CPI (0.12%), there were signs of firmer trends in services (ex-airlines), which ought to further improve with stronger wage inflation ahead. The Fed funds implied probability of another hike this year fell to 43% from 50% as of Thursday. The VIX fell to 9.69, its lowest level since 1993. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities were on the green (CRB futures: +1.11%) on the back of metals and oil. Iron ore prices icreased 1.38% and copper went up 1.16%. Oil prices also increased (WTI: +1.19% to USD 46.63/bbl). On the back of a weaker dollar (DXY: -0.65%) and stronger commodities (+1.08%), LatAm FX posted gains in the session. The MXN is trading 0.68% stronger to 17.5640/USD. The CLP appreciated 0.50% to 657.41/USD and the COP posted gains of 0.57% to 3,028/USD. At last, the BRL outperformed its peers, closing at 3.1796/USD (+1.01%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Credit spreads were mixed in LatAm. For the 5-year tenor, CDS in Mexico inched down 1bp to 109bps. In Colombia, spreads fell 2bps to 135bps and in Brazil they narrowed 4bps to 224bps. Bucking the regional trend, Chilean country risk widened 2bps to 67bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve bear flattened (Jan18x21: -9bps) in the session. In DI futures, the Jan-18 narrowed 4bps to 8.67% and the Jan-21 fell 13bps to 9.69% - back to mid-May levels. Similarly, real rates fell as the Aug-22 went down 12bps to 5.30%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Long Mexican yields narrowed, tracking US rates, and the belly was pressured by Governor Carstens remarks. During an interview for Reuters, he stated that it is premature to discuss rate cuts for 2018 (see Macro Backdrop). In TIIE swaps, the 2-year went up 4bps to 7.00% and the 10-year fell 4bps to 7.11%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, the curve shifted 2-3bps downwards. In Camara swaps, the 1-year fell 2bps to 2.37% and the 10-year went down 3bps to 4.12%. Chile Rates Tracker In Colombia, some rates narrowed. In IBR swaps, while the short end and the belly fell (1-year: -4bps to 5.00%), long rates were broadly stable in the session (10-year: flat at 6.24%). Colombia Rates Tracker

Upcoming Events

  • In Brazil, July’s IPCA-15 consumer inflation preview will be released (Thu). We forecast a 0.08% monthly fall, with year-over-year inflation slowing to 2.9% from 3.5%. With this result, inflation will have reached 1.5% from January to July, well below the 5.2% recorded during the same time window last year. Moreover, the Congress is set to enter recess until August 1. In the meantime, the vote on charges against President Temer in the Lower House floor will stay on hold until August 2. On the economic activity front, June’s CAGED formal job creation may come through. We expect a net loss of 30k jobs seasonally adjusted, in line with milder contractions in job creation. Then, FGV’s industrial business confidence preview for July will be released (Thu.). The results will be important to assess the impact of the more turbulent political scene. Still, June’s tax collection may be released sometime during the week. We forecast BRL 103.8 billion in tax collections, or a 2.6% increase in real terms. Moreover, the government will release its bimonthly revaluation report (Fri.), where it will update its forecasts for the 2017 primary result and may possibly announce a BRL 4 billion unfreeze on discretionary expenses. Onto the balance of payments report (Fri.), we expect a USD 1.3 billion current account surplus in June, topping last year’s deficit of USD 2.5 billion for the same month. We also expect direct investment in the country (DIC) to register inflows of USD 2.3 billion in June.
  • In Mexico, the Statistics Institute (INEGI) will announce June’s unemployment rate (Fri.). We expect the unemployment rate to post 3.5% (below the 3.9% level recorded in June 2016) indicating that labor market conditions remain tight. According to data reported by the Mexican Institute of Social Security (IMSS), formal employment has consistently grown above 4% year-over-year throughout the first six months of 2017. 
  • In Colombia, think-tank Fedesarrollo will release the June consumer confidence (Tue.). May’s confidence reading stayed in pessimistic territory (below 0) and worsened to -16.9% from -12.5% one year earlier indicating that a meaningful consumption recovery is unlikely in the short-term. Also, the trade balance for the month of May will be published (Wed.). We expect a trade deficit of USD 185 million, lower than the USD 0.7 billion deficits recorded one year ago. Ending the week, coincident activity indicator (ISE) for the month of May will be released (Fri.). The April indicator continued to reflect activity weakness as the seasonally adjusted series fell from the previous month for the fifth consecutive time. Annual year-to-date stands at 0.6% (2.7% in the 2016 equivalent period). 
  • In Argentina, the central bank will publish its quarterly monetary policy report (Tue.). We expect the report to shed light on the monetary policy stance given the challenges to meet the inflation target range in 2017. 

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa

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