Itaú BBA - LatAm FX weaken as NK-US rhetoric heats up

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LatAm FX weaken as NK-US rhetoric heats up

September 25, 2017

North Korean Foreign Minister RI Yong Ho warned that Pyongyang has the right to down US aircraft in international airspace.

With information available until 6:30pm Brasilia time

Highlights

  • LatAm FX posted widespread losses (-0.98%) on a risk off session. North Korean Foreign Minister RI Yong Ho warned that Pyongyang has the right to down US aircraft in international airspace. The BRL was the regional laggard, closing at 3.1597/USD (-1.10%). The MXN is depreciating 1.01% to 17.9272/USD. Andean pairs also weakened (COP: -0.68% to 2,926/USD; CLP: -0.81% to 629.41/USD). 
  • Short Brazilian yields didn’t sell off as the Focus survey showed 2017 inflation expectations below the floor of the target range (see Macro Backdrop). In DI futures, the Jul-18 was stable at 7.14%, whereas long rates widened substantially (Jan-21: +11bps to 8.84%). 
Macro Backdrop

BRAZIL

  • Inflation expectations declined to 2.97% for 2017 and 4.08% for 2018. According to Focus survey, IPCA inflation expectations declined further to 2.97% (-11bps) for 2017 and to 4.08% (-4bps) for 2018, and did not change for 2019 (at 4.25%). Also, year-end Selic expectations remained flat for the three years horizon, at 7.00% for 2017 and 2018, and 8.00% for 2019. GDP growth expectations increased 8bps for 2017 (to 0.68%) and 10bps for 2018 (at 2.30%), and did not change for 2019 (at 2.50%). Finally, the BRL appreciated to 3.16/USD for 2017 (from 3.20/USD), remained flat in 2018 (at 3.30/USD) and appreciated to 3.38/USD for 2019 (from 3.40/USD). See BCB Report
  • BCB placed the full offering of 12,000 FX swaps. After closing, the central bank announced another rollover auction of up to 12,000 contracts (USD 600 million) on September 26.
MEXICO
  • The GDP proxy (IGAE) surprised to the downside in July, mainly dragged by the fall of industrial output and a moderate slowdown of the services sector. The IGAE expanded 1% year-over-year, below our forecast (1.8%) and median market expectations (1.7%). According to calendar-adjusted data reported by the statistics institute (INEGI), growth was slightly higher (1.2% year-over-year), with the three-month moving average growth rate decreasing to 2% year-over-year (from 2.6% in June). By the same metric (calendar-adjusted, three-month moving average), the slowdown is visible both in industrial sectors (-0.6% year-over-year, 0% previously) and services sectors (3.4% year-over-year, 4% previously), although the latter continued significantly outperforming the former. 
  • We expect GDP growth of 2.3% in 2017, unchanged with respect to the previous year. Manufacturing output will likely be boosted by the strengthening of the US economy, and falling inflation coupled with robust employment will benefit the services sector. Moreover, we believe the headwinds on the construction sector - namely, the uncertainty associated to trade relations with the US and the fiscal cuts - will moderate. In fact, there is more clarity on the course of Nafta renegotiation (deal will likely be reached by 1Q18), and fiscal policy will become less restrictive (fiscal cuts announced for 2018 are much smaller compared to the previous two years). On the negative side, the main risks are the proximity of the presidential elections (which could affect business confidence, given the chance of policy discontinuity, as shown in the latest polls) and the after-effects of the earthquakes (which have disrupted economic activity in six states accounting for one third of Mexico’s GDP). Full Report

Market Developments 

  • GLOBAL MARKETS: Risk-off day as equity markets were on the red and US treasuries narrowed following an interview with North Korea’s foreign minister. According to the Wall Street Journal, Ri Yong Ho said North Korea now has “every right to make countermeasures, including the right to shoot down US strategic bombers, even if they are not yet inside the airspace border of our country”. The VIX widened to 10.78 and haven assets posted gains: gold (+1.04%), JPY (+0.23%) and CHF (+0.28%). Global Markets Tracker
  • CURRENCIES & COMMODITIES: Oil prices increased (Brent: +3.90% to 58.62/USD – highest since July 2015) amid concerns over supply disruptions in Iraqi Kurdistan’s crude exports. The autonomous region holds a referendum on independence. On a strong dollar day (DXY: +0.52%), LatAm FX posted widespread losses (-0.98%). The BRL was the regional laggard, closing at 3.1597/USD (-1.10%). The MXN is depreciating 1.01% to 17.9272/USD. Andean pairs also weakened (COP: -0.68% to 2,926/USD; CLP: -0.81% to 629.41/USD). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads (5-year) widened on a risk-off day. Chilean, Mexican and Colombian spreads went up 2bps to 62bps, 115bps and 129bps, respectively. Meanwhile, CDS in Brazil widened 4bps to 205bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Short Brazilian yields didn’t sell off as the Focus survey showed 2017 inflation expectations below the floor of the target range (see Macro Backdrop). In DI futures, the Jul-18 was stable at 7.14%, whereas long rates widened substantially (Jan-21: +11bps to 8.84%). Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican yields inched up in the session. In TIIE swaps, the 9-month and the 5-year increased 1bp to 7.30% and 6.69%, respectively. Likewise, the breakevens curve went down 4-6bps. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, the front end of the curve widened 2-3bps. In Camara swaps, the 1-year increased 2bps to 2.48% while past the 7-year yields inched up 1bp. Chile Rates Tracker In Colombia, most rates increased in the session. In IBR swaps, the 5-year widened 1bp to 5.38%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, the National Monetary Council is scheduled to meet to decide on the TJLP long term interest rate (Thu.). We expect the National Monetary Council to cut TJLP to 6.5% from 7.0%. Moreover, the nationwide unemployment rate for August will come out on Friday - we expect it to be unchanged at 12.7% (according to our seasonal adjustment). In addition, FGV’s business confidence surveys for September on industry, services, retail and construction will be released through the week. Also, the economic uncertainty indicator for September, also from FGV, will be released (Thu.).  Onto the balance of payments report (Tue.), we expect a USD 0.1 billion current account surplus in August and direct investment in the country (DIC) to register inflows of USD 7.2 billion in August. On fiscal accounts, the consolidated primary budget balance for August will come through (Fri.). We expect a BRL 14.9 billion deficit, with the central government result (due Thur.) posting a BRL 13 billion deficit. Finally, lawmakers in the Lower House Constitution and Justice Committee will choose a rapporteur for the second round of charges against President Temer. 
  • In Mexico, the statistics institute (INEGI) will announce August’s unemployment rate (Tue.). We expect the unemployment rate to post 3.4%. Then, INEGI will announce August’s trade balance (Wed.). We expect the trade deficit to continue narrowing in August, helped by exports. Moreover, Banxico will hold its monetary policy meeting (Thu.). We expect the Board to maintain the reference rate at 7%.  Finally, the Ministry of Finance (Hacienda) will announce August’s fiscal balance (Fri.). We expect the fiscal deficit indicators to continue narrowing, as fiscal consolidation makes headway. 
  • In Chile, the national statistics agency (INE) will publish the industrial activity indicators for the month of August (Fri.). We expect manufacturing production to expand 1.1% from last year (+2.6% in July). Also, INE will release the national unemployment rate for the quarter ending in August (Fri.). With job growth dynamics expected to endure, we see the unemployment rate reaching 6.9%, stable from one year ago. 
  • In Colombia, think-tank Fedesarrollo will release the August Industrial and Retail confidence indices (Wed.). We expect confidence levels to remain depressed in coming months amid a still timid activity recovery. Then, the institute of statistics (DANE) will release the August unemployment rate (Fri.). We expect the urban unemployment rate to rise to 10.7% in August from 9.9% recorded in the same month last year. Still, DANE will publish exports for the month of August (Fri.). We expect exports to come in at USD 3.1 billion, a 1% annual expansion, amid a higher base of comparison following the end of the transportation strike one year before. The highlight will be the BCCh’s monthly monetary policy meeting (Fri.). We expect the central bank board to leave the policy rate unchanged at 5.25%. In early 2018, as inflation eases, further easing is likely. 
  • In Argentina, the central bank will hold its biweekly monetary policy meeting, to decide on the reference rate (Tue.). We expect rates on-hold as inflation remains uncomfortable. The trade balance for August will also come out (Tue.). We expect a trade deficit of USD 65 million in August.  Then, the INDEC will publish the EMAE (official monthly GDP proxy) for July (Wed.). We expect activity to grow 3.7% year-over-year (0.5% mom/sa). Moreover, the INDEC will release the current account balance for 2Q17 (Wed.). We expect a current account deficit of 4.0% of GDP this year. Furthermore, the INDEC will publish the manufacturing and construction data for August (Thu.). Finally, the INDEC will publish the wage index for July (Thu.). 

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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