Itaú BBA - LatAm FX strengthen on a better external scenario

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LatAm FX strengthen on a better external scenario

November 16, 2017

LatAm pairs posted gains in a risk-on session (+0.97%), as equity markets strong on the green and US Treasuries widened.

With information available until 6:30pm Brasilia time

Highlights

  • LatAm pairs posted gains in a risk-on session (+0.97%), as equity markets strong on the green and US Treasuries widened. The BRL outperformed in the region, closing at 3.2774/USD (+1.15%) followed by the MXN (+1.00% to 19.0596/USD). Both the COP and the CLP appreciated 0.44% to 3,016/USD and 630.58/USD, respectively. 
  • In rates, the Brazilian curve bull flattened substantially (Jan19x25: -16bps) on a better external scenario and a stronger BRL. In DI futures, the Jan-21 fell 11bps to 9.41%. 

Macro Backdrop

BRAZIL
  • Itaú Unibanco monthly GDP advances in September. Our monthly GDP proxy went up 0.2% mom/sa in September. In 3Q17, growth reached 0.6% qoq/sa. Compared to 3Q16, the indicator expanded 1.6%. The result is above our forecast for 3Q17 GDP (+1.1% yoy). Several industrial and retail segments, as well as the labor market, have posted positive readings in recent months. Furthermore, recent PIBIU dynamics provide further support to our outlook for a gradual rebound in economic activity in Brazil. Full Report

COLOMBIA

  • Activity showed a moderate recovery in the third quarter of the year. Agriculture led the 2.0% year over year expansion in 3Q17 (1.2% in 2Q17), close to the market consensus of 2.1%, but lower than our 2.4% forecast. The bulk of the surprise to us came from weaker construction. The fastest expansion since 2Q16 helped lift the rolling-four quarters growth rate to 1.5% from 1.4% as of 2Q17 (the first pickup since the year ending in 1Q16). At the margin, activity built on the recovery in 2Q17 and bodes well for an improved performance in the second half of the year. Activity accelerated to 3.2% qoq/saar in 3Q17 (2.2% in 2Q17;-1.0% in 1Q17), led by agriculture, mining and utilities, while construction and commerce slowed down. 
  • The weaker than expected activity represents a mild downside risk to our 1.6% growth forecast for the year (2.0% for 2016). Recovering real wage growth and stronger external demand will aid an activity rebound in the second half of the year and in 2018. Moreover, as growth remains below potential, rate cuts at upcoming meetings are on the table. We expect the easing cycle to end with the policy rate at 4.5% (currently at 5.0%). Full Report
Market Developments
  • GLOBAL MARKETS: Risk-on day as equity markets strong on the green, US Treasuries widened (5-year: +3bps to 2.06%) and falling volatility gauges. Global Markets Tracker
  • CURRENCIES & COMMODITIES: In commodities space, energy stocks declined (WTI: -0.36% to USD 55.32/bbl), wheat dropped 1.40%. On the other hand, sugar increased 1.06% and iron ore surged 2.09%. In FX, LatAm pairs posted gains in a risk-on session (+0.97%). The BRL outperformed in the region, closing at 3.2774/USD (+1.15%) followed by the MXN (+1.00% to 19.0596/USD). Both the COP and the CLP appreciated 0.44% to 3,016/USD and 630.58/USD, respectively. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Credit spreads (5-year) receded all across LatAm. In Brazil, CDS fell 5bps to 179bps. Colombian spreads narrowed 4bps to 122bps. In Mexico, country risk decreased 3bps to 112bps and in Chile it receded 2bps to 53bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve bull flattened (Jan19x25: -16bps) on a better external scenario and a stronger BRL. In DI futures, the Jan-21 fell 11bps to 9.41%. Brazil Rates Tracker
  • LOCAL RATES – Mexico: The Mexican curve shifted 5-7bps downwards on the back of a stronger MXN. In TIIE swaps, the 1-year decreased 5bps to 7.57% and the 5-year went down 7bps to 7.34%. Real rates also went down as the Dec-25 fell 4bps to 3.44%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: The Chilean curve slightly steepened in the session. In Camara swaps, the 9-month went up 1bp to 2.48% and the 5-year increased 3bps to 3.56%. Chile Rates Tracker Colombian yields fell 2-4bps as the COP posted gains. In IBR swaps, the 18-month fell 4bps to 4.51% and the 10-year went down 5bps to 6.22%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, October’s CAGED formal job creation may come through. We forecast a net creation of 17k jobs (+11k jobs in seasonally adjusted terms). Then, the Service Sector Survey, PMS will be released. We expect a 0.7% mom/sa increase in both core and broad retail sales. For September’s PMS, we expect the headline to fall 2.4% yoy.
  • In Colombia, think-tank Fedesarrollo will release the October consumer confidence.

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



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