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LatAm FX sell off on higher odds of a FOMC hike in March

March 2, 2017

The BRL was the regional laggard as a Fed’s hike in March is the market’s new base case scenario.

With information available until 6:30pm Brasilia time

Highlights

  • DM yields widened as a Fed’s hike in March is the market’s new base case scenario. Accordingly, the USD strengthened across the board and commodities traded lower. All currencies under our coverage depreciated. The CLP weakened 0.62% to 654.73/USD. The MXN posted losses of 0.94% to 20.00/USD. The COP traded 1.53% lower to 2,980.96/USD. The BRL was the regional laggard, depreciating 1.89% to 3.1534/USD.
  • The Brazilian curve bear steepened pressured by the BRL sell-off and the weekly nominal auction. In DI Futures, the Jan-21 went up 10bps to 10.14%. To us, the Copom minutes suggest the authorities are open to the idea of accelerating the pace of easing, beyond the current 75bps, but have yet to make up their minds entirely (see Macro Backdrop). The front end implies nearly 93bps in cuts for the April meeting and almost prices another 75-bp cut in June. For the full year, the curve sees 286-328bps in flexibilization, pending on the term premium estimate. The Mexican curve widened, pressured by the rising of DM yields. In TIIE swaps, the 1-year went up 4bps to 7.24% and the 10-year increased 5bps to 7.87%. 

Macro Backdrop

BRAZIL
  • The Copom minutes suggest the authorities are quite open to the idea of accelerating the pace of easing, but have yet to make up their minds entirely. In the minutes out this morning, the Monetary Policy Committee of the Central Bank (Copom) explained the state of the ongoing policy debate and stressed that coming decisions will depend not only on the assessment of aspects of its forecasting model, such as the “structural interest rate” but also on incoming data and the balance of risks. We stick, for now, with the call that the next policy move (April 11-12) will also be a 75bps rate cut, and that the Selic will end the year at 9.25%, but we concede that the risk is for faster rate cuts and a lower terminal rate this year. Regarding the prospective scenario for inflation and rates, we attach particular importance to the March edition of the Quarterly Inflation Report (March 30), which may clarify (and ideally quantify) the Committee’s assessment on the new, presumably lower, structural interest rate in the Brazilian economy. Full Report
  • Trade surplus surprised to the upside in February. The trade balance netted a surplus of USD 4.6 billion in February, well above our estimate (USD 3.4 billion) and the market’s (USD 3.3 billion). Exports totaled USD 15.5 billion, increasing 1.9% m/m, while imports summed to USD 10.9 billion, a 1.7% m/m decline. Compared to February 2016, exports climbed 22.4% while imports increased 11.8%. Over 12 months, the trade balance reached USD 51 billion (USD 7.3 billion YTD). We maintain our expectation of slightly smaller trade surpluses in the coming years than in 2016, despite the fact that the strong result early in the year has added an upward bias to our forecast, due to the increase in the exported quantity of a few basic items. In our view, the combination of slightly stronger exchange rates (in real terms), the recovery in domestic demand and commodity prices below current levels will lead to weaker results over the coming months. Full Report
  • More modest downside surprises. Our Inflationary Surprise Index reached -0.23 in February. Leaving out Peru, the Latin American countries covered are seeing more modest downside surprises, or even positive ones. Nonetheless, the general inflationary trend is still skewed to the downside, as activity in the region struggles to pick up substantially from low levels and exchange rates in South America are stronger. Worthy of continuous monitoring and unlike its peers, Mexico carries a deteriorating outlook for inflation. Full Report
  • Supermarket sales (ABRAS) increased in line with expected in January. According to Broadcast, supermarket sales (ABRAS) increased 4.3% m/m in January (using our calculation) in line with expected, after a 3.5% decrease in December. The result is consistent with a core retail sales increase in January (preliminary forecast: 0.2%). For broad retail sales, we expect a decrease (-0.9%). 
MEXICO
  • The Central Bank of Mexico (Banxico) published February’s macroeconomic expectations survey, whose highlight – in our view – is the stability of long-term inflation expectations. Inflation expectations for 2017 increased somewhat, (to 5.4%, from 5.2% in the previous survey), but longer-term expectations were unchanged; 2018 (3.8%), average next 4 years (3.6%), and average next 5-8 years (3.5%). GDP growth expectations for 2017 (1.6%) and 2018 (2.2%) were also unchanged. Regarding the exchange rate, the market now expects a stronger peso, with the USDMXN median forecast revised to 21.1 (from 21.6) and 20.6 (from 21.6) for 2017 and 2018, respectively. Turning to monetary policy, expectations shifted towards a tighter trajectory for the reference rate, considering that median forecast for 2017 (to 7.25%, from 7.0%) and 2018 (to 7.40%, from 7.25%) were revised up. Overall, our takeaway from the survey is that the recent stability of long-term inflation expectations implies that the board might not be aggressive in hiking rates in the next policy decision (March 30). The guidance in the inflation report also hinted at a less aggressive tightening pace. We expect Banxico to hike 25-bps in March, provided that the Fed also hikes. 
COLOMBIA
  • Exports start 2017 on the front foot. In January, the pick-up in oil prices from one year ago offset the decline in export volumes. Meanwhile, coal and coffee export are experiencing a rise in both prices and quantities. Total exports increased 39.9% y/y in January (December: 33.8%) leading to a 28% rise in the quarter ending in January (4Q16: +14.2%). This is the highest moving quarter annual increase since the quarter ending in February of 2012, as the commodity prices recover. Oil exports rose 29.9% in the quarter (4Q16: 1.9%), while both coal and coffee exports increased by more than 50% in the quarter from one year ago. Meanwhile, exports excluding oil, coal, coffee, and ferronickel (Colombia’s traditional exports) continue to recover with growth of 15.6% in the quarter (4Q16: 12.1%). We estimate that at the margin total exports increased at an annualized quarter over quarter rate of 59% (4Q16: 77%), lifted by coffee and oil exports. Going forward, we expect the higher average commodity prices this year to support a narrowing of the trade deficit. As a result, we see the current account deficit coming in at 3.6% of GDP this year, continuing to decline from the 6.5% high recorded in 2015 and thereby reducing Colombia’s external vulnerabilities. 

Market Developments 

  • GLOBAL MARKETS: DM yields widened, as Fed’s Board Lael Brainard confirms NY Fed’s Bill Dudley message that a rate hike is likely to be appropriate ‘soon’, as the risks to the outlook seems more balanced. Also, confirming the new base case in the markets, Fed’s Powell says case for March hike has ‘come together’. In addition, US jobless claims drop to lowest level since 1973. In the 5-year sector, Treasuries increased 5bps to 2.04%. The Fed funds futures implied probability of a March hike rose to 90%, from 80% as of March 1. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities traded lower (CRB Futures Index: -1.28%) as energy prices fell (Brent: -2.16% to USD 55.14/bbl) and copper posted losses (-1.96%). In LatAm FX, all currencies under our coverage depreciated on the back of a stronger USD, as a Fed’s hike in March became the base case scenario. The CLP weakened 0.62% to 654.73/USD. The MXN posted losses of 0.94% to 20.00/USD. The COP traded 1.53% lower to 2,980.96/USD. The BRL was the regional laggard, depreciating 1.89% to 3.1534/USD. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Credit spreads for the 5-year tenor increased all across LatAm. Both Colombian and Mexican spreads inched up 1bp to 136bps. Chile traded at 71bps (+2bps). Brazilian country risk went back up to 221bps (+5bps). External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve bear steepened pressured by the BRL sell-off and the LTN (2017, 2019 and 2020) and NTN-F (2023 and 2027) auction. In DI Futures, the Jan-19 increased 3bps to 9.83% and the Jan-21 went up 10bps to 10.14%. To us, the Copom minutes suggest the authorities are open to the idea of accelerating the pace of easing, beyond the current 75bps, but have yet to make up their minds entirely (see Macro Backdrop). The front end implies nearly 93bps in cuts for the April meeting and almost prices another 75-bp cut in June. For the full year, the curve sees 286-328bps in rate cuts, pending on the term premium estimate. Brazil Rates Tracker
  • LOCAL RATES - Mexico: The Mexican curve widened, pressured by the rising of DM yields. In TIIE swaps, the 1-year went up 4bps to 7.24% and the 10-year increased 5bps to 7.87%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: Most Chilean rates edged higher in the session. In Camara swaps, the 1-year stood flat at 2.96%, while the 5-year went up 1bp to 3.63%. Chile Rates Tracker  In Colombia, IBR swaps were mixed; very front end narrowed (1-year: -1bp to 6.28%) while the belly and long end widened (5-year: +3bps to 5.89%). Colombia Rates Tracker

Friday Events

  • In Brazil, on economic activity, CAGED formal job creation for January may come through. We expect net closings of 36k jobs, which is -4k in seasonally adjusted terms.
  • In Mexico, INEGI will publish December’s gross fixed investment. We forecast that gross fixed investment grew 1% y/y.
  • In Chile, the national statistics agency (INE) will publish the rebased private consumption activity indicators. Retail sales have performed favorably, aided by an influx of consumption tourism and falling prices. 

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa



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