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LatAm FX strengthen after unexpected rise in Chinese FX reserves

March 7, 2017

Brazilian rates traded higher in the session, despite disappointing 4Q16 GDP data.

With information available until 6:30pm Brasilia time

Highlights

  • Asian and Chilean equity markets were firm on the green amid Chinese reserves data (see below). Commodities traded lower in the session, and EM FX posted gains of 0.25%. In LatAm FX, all the currencies under our coverage appreciated. The CLP gained 0.23% to 659.21/USD. The MXN strengthened 0.70% to 19.48/USD. The COP traded 0.55% higher to 2,955.66/USD. The BRL appreciated 0.58% to 3.1193/USD.
  • Brazilian rates traded higher in the session, despite disappointing 4Q16 GDP data (see Macro Backdrop). For 1Q17 we expect Brazilian GDP to grow. In DI Futures, the Jan-19 went up 4bps to 9.70% and the Jan-21 also increased 4bps to 10.00%, as the belly part of the curve widened the most.

Macro Backdrop

BRAZIL
  • Eight consecutive contractions in economic activity. GDP receded 0.9% q/q in 4Q16, disappointing our estimate (-0.6%) and the median of market expectations (-0.5%). Year-over-year, the contraction stood at 2.5%. In 2016, GDP declined 3.6%. The statistical carry-over for GDP in 2017 reached -1.1% (vs. our forecast of -0.9%). From the demand standpoint, we highlight the eighth consecutive drop in household consumption (-0.6%), which matched expectations. Gross fixed capital formation retreated 1.6%, but the slide was milder than anticipated (-2.9%). This positive surprise was offset by stronger-than-anticipated imports (3.2% vs. 1.2%). Government spending was virtually flat, at 0.1%, close to our call (0.2%) Exports receded more than expected (-1.8% vs. -0.9%). Changes in inventories contributed 0.5 p.p. to the quarter result (our calculation), also in line with our forecast. On the supply side, the service sector disappointed by contracting 0.8% (forecast: -0.6%), marking the eighth consecutive decline. Results for industrial production (-0.7%) and agriculture (1.0%) were close to our estimates.
  • We expect Brazilian GDP to grow in the first quarter of 2017. Coincident and leading indicators point to a mild increase in industrial production in the next months. In 1Q17, industrial output will benefit from a statistical carryover of 1.6%, due to a 2.3% gain in December. Hence, we anticipate a production increase in the quarter. We also foresee some stabilization in retail, led by auto sales. Business and consumer confidence levels remain on an upward trend, suggesting stronger activity ahead. Full Report
  • Auto production increased 3.6% m/m in February. According to Anfavea, auto production reached 200k, increasing 3.6% in the month, slightly stronger than we expected (0.6%). The exports increased 30% and remains on an upward trend. Inventories increased to 29 days of sales (January: 27), second increase in a row. Along with other economic activity indicators (such as energy consumption and capacity utilization) our preliminary forecast for industrial production in February is 0.6% m/m.
CHILE
  • The trade balance surplus narrows temporarily. The trade surplus in February came in at USD 236 million, below market consensus (USD 310 million) and our forecast (USD 650 million). The trade surplus was also inferior to the USD 809 million surplus recorded one year ago. As a result, the 12-month trade surplus narrowed to USD 3.9 billion, compared to the USD 4.6 billion at the end of 2016, but still means Chile’s external vulnerabilities are limited. Total exports declined 1.8% y/y (January: 8.8%), with mining exports falling 9.9% (January: +18.8%). Industrial goods exports led a sequential acceleration of total exports to 27.6% q/q (4Q16: 18.7%).  Imports grew 12.1% y/y (January: 13.4%), with durable consumption goods imports up 25.1% - led by vehicle imports – and energy products (petrol, diesel, etc.) rising on the back of recovering oil prices and a low base of comparison. In the quarter, annual import growth was 7.0% (flat in 4Q16), the highest rate since the quarter ending in February 2013. With the expectation that copper prices will on average be above last year’s level, while internal demand remains weak, Chile’s external imbalances are set to stay low this year. We estimate a current-account deficit broadly stable from the 1.7% of GDP estimated for last year. Full Report
  • The institute of statistics (INE) reported nominal wage growth of 4.4% y/y in January (previous: 4.7%), as low inflation and the loosening labor market ease wage pressure. Wages gained 1.1% from the previous month, less than the 1.4% one year ago, led by the commerce sector. In the quarter ending in January, nominal wages grew 4.7% (4Q16: 4.9%; 3Q16: 5.1%). Adjusted for inflation, wage growth was 1.5% y/y in January (December: 2.0%), while real wages were up 1.8% in the rolling quarter (4Q16: 2.0%). The real wage bill growth worsened in the quarter, decelerating to 2.6% (4Q16: 3.0%) when considering total employment growth. It also dipped to 0.6% when only waged employment is included (4Q16: 1.9%), the lowest growth since the initiation of the new labor survey in 2010. The deteriorating real wage bill hints that the recent pick-up in private consumption related activity could be short-lived. 

Market Developments 

  • GLOBAL MARKETS: Asian and Chilean equity markets were firm on the green amid Chinese data. The FX reserves unexpectedly rose to USD 3,005 billion in February (January: USD 2,998 billion). We estimate that FX valuation effects contributed to a USD 11 billion decrease. Therefore, we estimate the flow related to the change in FX reserves was actually positive (USD 17 billion) for the first time since June 2016. The result suggests the capital outflow pressure is diminishing, helped by higher domestic deposit rates and the additional rules to prevent capital outflows. Treasuries increased, as the 5-year increased 3bps to 2.04% and the 10-year went up 1bp to 2.51%. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities traded lower in the session, and EM FX appreciated after stronger than expected Chinese data. Oil prices (Brent) decreased to USD 55.89/bbl (-0.21%), iron ore fell 0.32% and copper went down 1.45%. In LatAm FX, all the currencies under our coverage appreciated. The CLP gained 0.23% to 659.21/USD. The MXN strengthened 0.70% to 19.48/USD. The COP traded 0.55% higher to 2,955.66/USD. The BRL appreciated 0.58% to 3.1193/USD. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads for the 5-year tenor had a quiet session. Chilean, Mexican and Colombian spreads stood flat at 71bps, 129bps and 130bps, respectively. On the other hand, Brazilian risk edged higher to 219bps (+2bps). Brazil’s National Treasury has offered USD 1 billion in 10-year bonds (Global 2026). External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Despite 2016’s below expectations (see Macro Backdrop), Brazilian rates traded higher in the session. In DI Futures, the Jan-19 went up 4bps to 9.70% and the Jan-21 also increased 4bps to 10.00%, as the belly part of the curve widened the most. For the full year, the curve still sees 288-330bps in rate cuts, pending on the term premium estimate. Brazil Rates Tracker
  • LOCAL RATES - Mexico: The Mexican curve traded lower on average. In TIIE swaps, longer term rates (past 3-year) edged 2-3 bps lower, as the 10-year went down to 7.70% (-3bps). Meanwhile, 1-year and 2-year swaps stood flat at 7.19% and 7.28%, respectively. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: Chilean rates were mixed in the session. The very short part of the Camara swaps curve inched down 1bp, the belly part edged higher (2-year: +2bps to 3.06%) and the long end of the curve also traded lower (10-year: -2bps to 4.21%). Chile Rates Tracker In Colombia, IBR swaps decreased. Front end narrowed (1-year: -5bps to 6.16%), as did the belly (4-year: -3bps to 5.75%) and long end edged lower (10-year: -1bp to 6.48%). Colombia Rates Tracker

Upcoming Events

  • In Brazil, January's industrial production will hit the wires (Wed.). We expect production to be broadly stable in the month, with a 0.1% m/m increase seasonally adjusted. Moving to the inflation front, February’s IPCA will come out (Fri.), for which 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 Chile, INE will publish inflation data for February (Wed.). We expect prices to gain 0.3% from January (+0.5% in January), but acknowledge upside risks. 
  • 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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