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LatAm FX weaken as markets focus on geopolitical risks

April 11, 2017

Market concerns over the Asian and Middle Eastern geopolitical outlooks prompted a flight to haven.

With information available until 6:30pm Brasilia time

Highlights

  • In LatAm FX, all currencies under our coverage depreciated following the risk off tone in global markets in the session. The COP posted losses of 0.37% to 2,875.88/USD and the CLP weakened 0.23% to 654.47/USD. The MXN was the laggard among the majors, trading 0.52% lower to 18.78/USD. The BRL depreciated at the margin, closing at 3.1374/USD (-0.18%).
  • Short Brazilian yields narrowed on the eve of the Copom decision. In DI Futures, the Jun-17 decreased 4bps to 11.16% and the Jan-18 fell 5bps to 9.62%. For the next two meetings (April and May), the curve fully prices 200bps in rate cuts. Long rates, however, traded higher due to the risk off tone in global markets amid geopolitical concerns. For the Jan-23, yields increased 3bps to 10.08% and for the Jan-25 they went up 5bps to 10.19%.

Macro Backdrop

MEXICO
  • Industrial production in February shows weakness in spite of a solid manufacturing sector. Mexico’s industrial production came in weaker-than-expected, down 1.7% y/y in February – below our call and market consensus (both at -1.5%) - although adjusted for calendar effects output was almost flat from one year before. Sequentially industrial production posted a poor 0.1% m/m growth, bringing the quarter-over-quarter expansion to 0.8% (annualized), from 1.0% in January. The weakness of industrial production is largely due to falling mining output (-8.8% q/q). Manufacturing production stood stable between January and February, but momentum remains strong (+7.0% q/q). Meanwhile, construction activity weakened to 0.5% q/q, in spite of a solid 0.9% m/m gain in February. Full Report Below

Market Developments 

  • GLOBAL MARKETS: Risk off day with safe havens gaining strength on the compounding increased market concerns over the Asian and Middle Eastern geopolitical outlooks. Gold prices rose 1.75%, Treasuries went down (5-year: -7bps to 1.83%) and in FX, the JPY (+1.19%) posted gains – breaking below 110/USD for the first time since the US elections in November. Also, equity markets were on the red and volatility gauges increased as the VIX reached its highest level year-to-date. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities were mixed as oil prices increase (WTI: +0.54% to USD 56.28/bbl) and iron ore prices fall 1.55%. Oil pared daily losses on a report that Saudi Arabia wants OPEC to extend production cuts past June. In LatAm FX, all currencies under our coverage depreciated following the risk off tone in the session. The COP posted losses of 0.37% to 2,875.88/USD and the CLP weakened 0.23% to 654.47/USD. The MXN was the laggard among the majors, trading 0.52% lower to 18.78/USD. The BRL also depreciated, closing at 3.1374/USD (-0.18%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm Credit spreads for the 5-year tenor increased at the margin. CDS in Mexico, Colombia and Chile inched up 1bp to 128bps, 132bps and 73bps, respectively. In Brazil, spreads increased a tad more, to 224bps (+2bps). External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Short Brazilian yields narrow in the session. In DI Futures, the Jun-17 decreased 4bps to 11.16% and the Jan-18 fell 5bps to 9.62%. For the next two meetings (April and May), the curve fully prices 200bps in rate cuts. Long rates, however, traded higher due to the risk off tone in global markets amid geopolitical concerns. For the Jan-23, yields increased 3bps to 10.08% and for the Jan-25 they went up 5bps to 10.19%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: The Mexican curve traded range bound in the session. In TIIE swaps, the 1-year stood flat at 7.20% and the 5-year inched down 1bp to 7.28%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, most yields narrowed in the session. In Camara swaps, while the 1-year was flat at 2.68%, the 5-year went down 2bps to 3.38%. The curve implies 86-98bps in rate cuts by the end of the year. Chile Rates Tracker In Colombia, yields traded marginally higher. In IBR swaps, while short rates (before 2-year) were broadly flat (1-year: at 5.74%), long yields increased as the 5-year went up 1bp to 5.54%, the 10-year increased 4bps to 6.14%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, the BCB will announce the Selic decision (Wed.). We assess that the Committee will carry out a 100-bp interest rate cut, bringing the Selic rate to 11.25%. Regarding the communiqué, we expect the Committee to signal that the extension of the easing cycle will depend on forecasts and inflation expectations, but also on estimates of the structural interest rate of the Brazilian economy. Then, the key releases on economic activity will be February’s retail sales numbers (Wed.) and the Service Sector Survey (PMS) for February (Thu.). We forecast a 0.1% m/m increase in core retail, whereas the broad segment, which includes vehicle sales and construction material, will probably grow 2.2% m/m on stronger vehicle sales. Also, the PMS data for the month of January is going to be republished due to a revision (Thu.). Finally, the government will submit the Budgetary Guidelines Law (LDO), which establishes spending targets for the federal government (deadline Thur.).
  • In Mexico, the Central Bank will publish the minutes of March’s monetary policy meeting (Wed.). The minutes will be interesting because they will shed more light about the arguments of the board to opt for more gradual tightening.
  • In Chile, the BCCh will hold its monthly monetary policy meeting (Thu.). In spite of the weak activity and moderate inflation registered in the lead up to the meeting, we expect the central bank to leave the policy rate unchanged at 3.0%, as a cautious approach is adopted.

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa



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