Itaú BBA - LatAm FX strengthen ahead of the U.S. payrolls report

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LatAm FX strengthen ahead of the U.S. payrolls report

February 2, 2017

In LatAm FX, Andean pairs staged a late reaction to the FOMC meeting.

With information available until 6:30pm Brasilia time

Highlights

  • Ahead of the U.S. non-farm payrolls report investor’s sentiment remained positive: volatility gauges fell and credit spreads narrowed. In LatAm FX, Andean pairs staged a late reaction to the FOMC meeting (+0.94% to 2,878.14/USD; CLP: 0.60% to 643.56/USD). The BRL also posted gains (0.21% to 3.1217/USD), while the MXN outperformed (1.07% to 20.29/USD).
  • In rates, the DI Futures curve bull-flattened across the curve, as the Jan19x25 spread narrowed 6bps. In DI futures, the Jan-19 narrowed 4bps to 10.31%. Breakevens tightened as well, as the 5y5y decreased 4bps to 5.25%.The Mexican curve steepened (1s10s: +2bps). In TIIE swaps, the 1-year fell 2bps to 7.10% and the 10-year stood at 7.91%. The curve implies roughly 150bps in rate hikes for 2017; in our baseline scenario, we see Banxico taking the policy rate to 7.00% by YE17.

Macro Backdrop

BRAZIL
 

  • Deputy Rodrigo Maia was re-elected Speaker of the Lower House. He was elected in the first ballot, with 293 votes.

COLOMBIA
 

  • Exports pick-up at the close of 2016. Total exports increased 32.7% y/y in December (previous: +12.7%) leading to a rise of 13.8% y/y in the final quarter (3Q16: -8.8%) - the highest since the quarter ending in April of 2012. Oil exports rose 1.9% y/y in 4Q16 (3Q16: -14.9%), while both coal and coffee exports increased by more than 40% y/y. At the margin, total exports increased at an annualized rate of 72% q/q (3Q16: +5%), lifted by coffee exports. Oil was the main drag in 2016, dropping 29.1% (2015: -50.8%). Going forward, we expect strong exports to continue as commodity exports face low base of comparison for prices, helping to narrow the trade deficit and reduce Colombia’s external vulnerability.

ALL LATAM
 

  • Positive activity surprises were registered in January, but recovery will likely be slow. Our Itaú Activity Surprise Index improved in January, climbing to 0.14, from 0.09 in December. The Mexico outperformed, but its outlook remains unfavorable. While improvement was seen in Brazil, positive surprises were relatively concentrated and due to one-off factors. Data points to a weak final quarter in 2016 in Brazil, Colombia and Chile. The reality suggests that activity in the region is picking up, but that a recovery will be slower than expected. Full Report
  • Inflationary pressures continue to retreat in South America. Our Itaú Inflationary Surprise Index reached -0.37 in January. Persistent negative inflation surprises translate into the observed stability of the index in negative terrain. Following the recent trend, inflationary pressures continue to recede in Brazil, Colombia and Chile. Lastly, Mexico’s inflationary surprises have veered moderately to the downside, though out of its peers, the country bears the more challenging inflation outlook going ahead. Full Report

GLOBAL
 

  • Global Monetary Policy Monitor: South American rates are on a downward trend. Policy decisions took place in 15 of the 33 countries under our coverage. In South America, interest rates are on a downward trend, although central banks in Colombia, Argentina and Peru chose to maintain their benchmark rates unchanged during the month. In Brazil, the central bank accelerated the pace of cuts in the Selic rate to 75 bps, in line with our call. In Chile, the central bank reduced rates by 25bps. On the opposite track, we expect the central bank of Mexico to follow the Fed and raise interest rates by 50 bps this month. On DMs, the Fed maintained its benchmark rate and signaled that further increases will be data-dependent, contributing to sustain a favorable external environment for emerging economies. The BoE did not extend its asset-purchase program. Full Report

Market Developments

  • GLOBAL MARKETS: Ahead of the U.S. non-farm payrolls report investor’s sentiment remained positive: volatility gauges fell and credit spreads narrowed. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities traded lower, as dragged by energy (WTI: -0.54% to USD 53.59/bbl) and metals (copper: -1.05%). In LatAm FX, Andean pairs staged a late reaction to the FOMC meeting (+0.94% to 2,878.14/USD; CLP: 0.60% to 643.56/USD). The BRL also posted gains (0.21% to 3.1217/USD), while the MXN outperformed (1.07% to 20.29/USD). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Credit spreads receded all across LatAm. For the 5-year tenor, Brazil traded at 243bps (-3bps), a level last seen on 1H15. Colombian spreads fell to 148bps (-3bps), Chile to 79bps (-2bps) and Mexican CDS edged down 3bps to 162bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The DI Futures curve bull-flattened across the curve, as the Jan19x25 spread narrowed 6bps. In DI futures, the Jan-19 narrowed 4bps to 10.31%. Breakevens tightened as well, as the 5y5y decreased 4bps to 5.25%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: The Mexican curve steepened (1s10s: +2bps). In TIIE swaps, the 1-year fell 2bps to 7.10% and the 10-year stood at 7.91%. The curve implies roughly 150bps in rate hikes for 2017; in our baseline scenario, we see Banxico taking the policy rate to 7.00% by YE17. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: Chilean rates accompanied the tightening of external yields, edging down 2-3bps past the 3-year. Chile Rates Tracker In Colombia, the IBR swaps curve headed south (-3bps in average); the 2-year decreased 4bps to 5.83%. Colombia Rates Tracker

Friday Events 

  • In Mexico, gross fixed investment will be released. We expect it to print 0.3% y/y.
  • In Chile, BCCh's minutes are on the market's radar. BCCh will publish the minutes from the January monetary policy meeting. With the market now pricing in more rate cuts than the 50-bp cycle outlined in the 4Q16 Inflation Report, the minutes could provide some indication on the magnitude of the easing cycle.
  • In Colombia, the Inflation Report is on the radar.

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa



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