Itaú BBA - LatAm FX weaken on higher political concerns in France

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LatAm FX weaken on higher political concerns in France

February 17, 2017

Brazil is moving to a new equilibrium; so we hold a bullish view on local rates, even though our tools show little mispricing.

With information available until 6:30pm Brasilia time


  • Amid lower liquidity because of Monday’s holiday in the US, markets continued Thursday’s move trading in a risk-off tone amid concerns with the upcoming French elections. Major equity markets were on the red and LatAm FX weakened. The BRL depreciated to 3.0978/USD (-0.26%), the CLP (-0.94% to 644.82/USD) was the regional laggard. The COP traded at 2,891.56/USD (-0.52%) and the MXN registered losses of 0.23% to 20.43/USD.
  • The IBR curve bear steepened (1s8s: +5bps) on higher risk aversion overseas. In contrast, DI Futures tightened, predominantly on the belly part of the curve. The Jan-19 decreased 9bps to 10.07%.
  • The Brazilian economy is moving towards a new (and improved) macroeconomic equilibrium and for this reason we hold a structurally bullish view on Brazilian rates, even though our valuation tools show little to no mispricing. In our Monthly Strategy Report we argue that Brazil’s duration-risk will outperform EM peers, owing to the country’s comfortable external position and relatively small share of local debt held by foreigners.

Macro Backdrop

  • The current account deficit reaches USD 5.1 billion in January. The deficit was below our estimate (USD -5.6 billion) and market consensus (USD -5.4 billion). Over 12 months, the current-account deficit was virtually stable, at USD 23.8 billion or 1.3% of GDP. The seasonally-adjusted annualized three-month moving average improved to -$25.7 billion in January (December: -$29.1 billion). Also, the trade balance posted a USD 2.5 billion trade surplus in January (Jan-16: USD 647 billion). A stronger exchange rate (on average) and some economic recovery during 2017 will likely produce a slightly wider current account deficit than in 2016. Our forecast is USD -33 billion this year (2016: -26.5 billion).
  • Strong inflows in direct investment in the country (DIC) in January offset by substantial outflows in recent months. DIC surprised again by reaching USD 11.5 billion in January, above our estimate (USD 10.0 billion) and the consensus’ (USD 9.4 billion). Equity capital transactions accounted for 76.1% of total DIC. Over 12 months, the investments in the country expanded to USD 85 billion. Foreign investment in the local capital markets was positive by USD 1.5 billion (after five consecutive months of outflows), driven by USD 502 million inflows to the fixed income market (after six months of outflows) and USD 976 million inflows to the stock market. In terms of financing, DIC remains elevated and portfolio flows (to stocks and fixed income) are still negative over 12 months. Full Report
  • BCB placed the full offering of 6,000 FX swaps. After closing, the Central Bank called a roll over auction of up to 6,000 contracts on February 20.
  • Trade deficit narrowed in 2016, after reaching a historical high in 2015. The trade deficit came in at USD 487 million in December, in line with our estimate (USD -455 million), while smaller than consensus (USD -600 million). As a result, the trade deficit narrowed to USD 11.8 billion last year (2015: USD -15.9 billion). At the margin, the trade deficit decreased further, with the annualized trade deficit (using our seasonal adjustment) reaching USD 8.0 billion in 4Q16 (3Q16: USD -11.6 billion). Going forward, we expect robust year-over-year export growth to continue as commodity prices face a low base of comparison, helping to narrow the trade deficit and reducing Colombia’s external vulnerabilities. We forecast the current-account deficit to reach 3.6% of GDP this year, following an estimated 4.4% of GDP in 2016 (2015: 6.5%). Full Report

Market Developments 

  • GLOBAL MARKETS: Market continued Thursday’s move trading in a risk-off move amid market concerns with the upcoming French elections. Also, volatility stood lower and most major equity markets were on the red, probably due to lowered liquidity because of Monday’s holiday in the US. Long DM rates tightened again (3bps on average) and all US Treasuries traded lower (10-year: -3bps to 2.42%). The Fed funds futures implied probability of a March hike fell to 32% from 36% as of Thursday. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities traded lower and oil prices stood flat. The CRB futures index registered losses (-0.33%) and there was a decrease in soybean prices (-1.09%). On the other hand, iron ore overperformed (+2.24%). Brent edged up to USD 55.71/bbl (+0.11%). In LatAm FX, all currencies under our coverage depreciated. The COP traded at 2,891.56/USD (-0.52%) and the MXN registered losses of 0.23% to 20.43/USD. While the BRL depreciated to 3.0978/USD (-0.26%), the CLP (-0.94% to 644.82/USD) was the regional laggard. FX & Commodities Tracker 
  • CDS SPREADS & EXTERNAL BONDS: The 5-year tenor credit spreads widened all over LatAm for the third consecutive day. In Chile and Colombia, spreads increased only 1bp to 82bps and 145bps, respectively. Mexican CDS increased to 158bps (+3bps). Meanwhile, the Brazilian spread increased the most, again, trading at 232bps (+4bps). External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The DI Futures curve tightened. The belly part of the curve was under pressure, with the Jan-19 decreasing 9bps to 10.07%, while the Jan-25 fell 4bps to 10.54%. The curve now implies 325bps to 384bps in rate cuts for 2017. Accordingly, long breakevens fell (5-year: -5bps to 4.52%). Brazil Rates Tracker
  • LOCAL RATES - Mexico: The Mexican curve traded range bound. The 1-year increased 1bp to 7.25% and the 10-year went down 1bp to 7.95%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: Long Camara rates (past 8-year) traded higher. The 1-year went down to 3.00% (-1bp) and the 9-year increased 3bps to 4.05%. Chile Rates Tracker  The IBR curve bear steepened (1s8s: +5bps). The 6-month fell 2bps to 6.89% and the 10-year went up 2bps to 6.46%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, all eyes will be on the Central Bank’s Monetary Policy Committee (Copom) meeting (Wed). We expect another 75 bps interest rate cut, lowering the Selic rate to 12.25%. Then, IPCA-15 consumer inflation preview for February will be released (Wed.), for which we forecast a 0.52% m/m rise. Also, FGV’s industrial business confidence preview for February will be released (Mon). We expect a 3.0% rise seasonally adjusted. The final industrial business confidence reading by FGV will be released on Friday. Furthermore, the nationwide unemployment rate for January will come through (Fri.). We forecast the unemployment rate to reach 12.5%, which in seasonally-adjusted terms means unemployment will climb to 12.8% from 12.6%. Moreover, CAGED formal job creation for the same month may come through. We expect net closings of 36k jobs, which is -4k in seasonally adjusted terms. Also worthy of note, the Central Bank’s credit report will come through (Thu.). Then, the consolidated primary budget balance for December will come through (Fri.). Finally, January’s tax collection may be released. We forecast BRL 137.8 billion. 
  • In Mexico, INEGI (the statistics institute) will publish 4Q’s and 2016’s GDP growth (Wed). We expect it to come in at 2.2% y/y and 2.3% y/y, respectively. INEGI will also publish December’s monthly GDP proxy (IGAE) (Wed.), for which we forecast at 1.8% y/y. Also, CPI inflation figures for the first half of February will be published (Thu.). We expect bi-weekly inflation to post 0.32%. Then, Banxico will publish (Thu.) the minutes of February’s monetary policy meeting. INEGI will announce December’s retail sales (Fri.). We estimate that retail sales growth at 6.8% y/y. Finally, the Central Bank will publish Q4’s current account balance (Fri.). We expect the current account deficit at USD 4.4 billion in 4Q16. 
  • In Colombia the central bank will hold its second monetary policy meeting of 2017. We expect the central bank to stay on hold at this meeting. Moreover, the national statistics authority will publish (Wed.) the supply-side breakdown of GDP growth for 4Q16. We estimate activity gained 0.6% from the previous quarter, resulting in annual growth of 1.2%. Also, the December activity coincident indicator (ISE) will be published (Wed.). Then, Fedesarrollo will publish (Wed.) the January retail and industrial confidence levels.

Latam Macro Calendar

Today's editors: Eduardo Marza, Pedro Correa

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