Itaú BBA - LatAm FX weaken on external headwinds

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LatAm FX weaken on external headwinds

May 4, 2017

Local currencies underperformed tracking EMFX (-0.53%) and lower commodity prices (Commodity FX: -1.15%).

With information available until 6:30pm Brasilia time

Highlights

  • Ahead of the US nonfarm payroll and unemployment data, markets traded in a risk-off tone. In FX, LatAm currencies underperformed tracking EMFX (-0.53%) and lower commodity prices (Commodity FX: -1.15%). The COP was the LatAm laggard, closing at 2,979.57 (-1.65%). The MXN is trading 0.98% lower to 19.05/USD and the CLP posted losses of 0.98% to 675.99/USD - weakest level year-to-date. Even though the BRL depreciated 0.70% to 3.1885/USD, the pair outperformed the currencies under our coverage as the pension reform cleared the special committee Wednesday night (see Macro Backdrop).
  • Local curves steepened all across LatAm. In DI futures, the spread Jan18x25 widened 3bps. Elsewhere, the 1s10s spreads also increased 3bps. 

Macro Backdrop

BRAZIL
  • The Social Security reform’s report base text was approved last night in the Lower House Special Committee by 23 votes in favor and 14 against. The result represents an approval rate 62% of all Committee members. According to the pension reform special committee president Marun, another session will be held next Tuesday (May 9) to vote amendments to the report. After this, the next step is a vote in the Lower House plenary, where 308 votes or 60% of the total number of Lower House representatives is needed for approval.
  • Brazilian market conditions deteriorated in April. The Itaú Unibanco Market Conditions Index (IU-MCI) fell to -0.45 from -0.10. The decline owes to both a drop in commodity prices and worsening financial variables (mostly due to the former). The three-month moving average was stable at around 0.47, highlighting the fact that, despite the month’s deterioration, market conditions remain in expansionary territory. Full Report
MEXICO
  • Mexico’s gross fixed investment weakened significantly in February, dragged by the poor performance of non-residential construction. Gross fixed investment contracted 3.1% y/y in February – way below our forecast and market expectations (both 0.1% y/y expansion) – leaving the 3-month moving average growth rate at -0.8% y/y (down from 1.2% y/y in January). Importantly, a negative leap-year effect subtracted 0.6p.p. from February’s year-over-year growth rate. At the margin, gross fixed investment fell 0.8% from the previous month, posting a quarter-over-quarter annualized contraction (-4.2% qoq/saar, -2.2 % in January). Looking at the breakdown, the growth of investment in machinery & equipment (3.7% y/y sa) was more than offset by the contraction of construction (-4.1% y/y sa). Within construction, residential construction expanded but non-residential construction fell sharply (-11.7% y/y sa). The latter is vulnerable to the fall of public investment. Looking ahead, we expect a further weakening of gross fixed investment. The uncertainty surrounding bilateral relations with the U.S. will likely put some investment decisions on hold, while the fiscal consolidation will hit public investment.
ALL LATAM
  • Our Itaú Inflationary Surprise Index increased to -0.09 in April, coming from -0.16 in March. The narrative is similar to last month’s in that Mexico led the acceleration, while Brazil kept the index in the negative range, as the widespread disinflationary trend extends itself. This is a natural outcome, in what has been a sharper contraction in economic activity in Brazil vis-à-vis its Latin American peers. Full Report
Market Developments 
  • GLOBAL MARKETS: Ahead of the US nonfarm payroll and unemployment data, markets traded in a risk-off tone and US Treasuries widened (5-year: +3bps to 1.88%). VIX remained in low levels while EM volatility went up. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities posted losses in the session (CRB futures: -1.88%, reaching a 12-month low). Oil (WTI: -4.75% to USD 45.55/bbl – 6-month low) is testing pre-Opec deal levels, iron ore prices dropped 6.89% and copper fell 1.16% to a 5-month low. In FX, LatAm currencies underperformed tracking EMFX (-0.53%) and lower commodity prices (Commodity FX:-1.15%). The COP was the LatAm laggard, closing at 2,979.57 (-1.65%). The MXN is trading 0.98% lower to 19.05/USD and the CLP posted losses of 0.98% to 675.99/USD - weakest level year-to-date. In addition, Banxico called an auction for May 5 to roll over the FX hedge (USD 200 million). Even though the BRL depreciated 0.70% to 3.1885/USD, the pair outperformed the currencies under our coverage as the pension reform cleared the special committee Wednesday night (see Macro Backdrop). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Credit spreads for the 5-year tenor widened across LatAm. CDS in Chile increased 3bps to 75bps. Country risk in Brazil and Mexico both went up 6bps to 216bps and 119bps, respectively. Colombian spreads widened the most, to 130bps (+7bps). External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve bear steepened on the back of a weaker BRL. Also, the strong LTN auction (Apr-18, Apr-19, Jul-20) put some pressure on rates. In DI futures, the Jan-18 went up 3bps to 9.44% and the Jan-21 widened 7bps to 10.03%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican yields widened in the session, tracking US Treasuries. In TIIE swaps, the 1-year increased 7bps to 7.28% and the 5-year went up 8bps to 7.26%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, yields also increased in the session. In Camara swaps, the 18-month widened 3bps to 2.63% and the 5-year increased 4bps to 3.41%. Chile Rates Tracker In Colombia, the very front fell and long widened. In IBR Swaps, while the 9-month inched down 1bp to 5.42%, the 5-year increased 3bps to 5.21%. Colombia Rates Tracker

Friday Events

  • In Brazil, Anfavea will release data from the automobile sector in April. The data helps to estimate industrial production and retail sales for that month.
  • In Chile, the central bank will publish the GDP proxy (Imacec) for the month of March. We expect the GDP proxy to decline 0.9% from February (-0.7% in the previous month), resulting in an annual growth rate fall of 1.0% (-1.3% in the previous month), concluding the weakest quarterly activity since the global financial crisis. Then, the National Institute of Statistics (INE) will publish nominal wage growth for March. Wage inflation has continued to moderate as the labor market loosens, the economy cools and inertia stays low (as inflation is running below the target). 
  • In Colombia, inflation for April will be released. We expect consumer prices to gain 0.37% from March, taking annual inflation down to 4.55%, with core prices (inflation excluding food and energy) remaining sticky. 

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa




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