Itaú BBA - LatAm FX weakens on a strong dollar day

Latam FI Strategy Daily

< Back

LatAm FX weakens on a strong dollar day

September 11, 2017

LatAm pairs (-0.35%) posted losses as the USD gave back recent losses (DXY: +0.67%).

With information available until 6:30pm Brasilia time

Highlights

  • LatAm pairs (-0.35%) posted losses as the USD gave back recent losses (DXY: +0.67%). The BRL was the regional laggard, closing at 3.1055/USD (-0.59%). Andean pairs also depreciated (COP: -0.54% to 2,923/USD; CLP: -0.38% to 622.74/USD). The MXN was broadly stable at 17.6961/USD (+0.09%). 
  • Risk on day in global scope with equity markets were strong on the green and volatility gauges narrowed in the session. US Treasury yields increased substantially (5-year: +7bps to 1.71%). 
Macro Backdrop

BRAZIL

  • Year-end Selic expectations declined 25bps to 7.00%. According to Focus survey, year-end Selic expectations fell 25bps for 2017 and 2018 (to 7.00% and 7.25%, respectively) and did not change for 2019 (at 8.00%). Also, IPCA inflation expectations declined to 3.14% (-24bps) for 2017 and to 4.15% (-3bps) for 2018, while it has remained flat at 4.25% for 2019. GDP growth expectations increased to 0.60% (+10bps) for 2017 and to 2.10% (+ 10bps) for 2018, while it has remained flat for 2019 (at 2.50%). Finally, the BRL did not change for the three years horizon: at 3.20/USD for 2017; at 3.35/USD for 2018; at 3.40/USD for 2019. See BCB Report
MEXICO
  • Industrial production surprised to the downside in July, with a pronounced deterioration of construction activity (which reflects the weakness of investment). Industrial production fell 1.6% year-over-year, undershooting our forecast (0.6%) and median market expectations (-0.2%). According to calendar-adjusted data reported by the statistics institute (INEGI), the contraction was also 1.6% year-over-year, pulling down the three-month moving average growth rate to -0.6% year-over-year (from nil in June). 
  • We expect a sequential improvement of industrial production in coming quarters. Manufacturing exports will likely be boosted by firmer US activity. Oil output seems to be bottoming out, so mining (largely oil) will no longer represent such a big drag on industrial output. In fact, the fiscal consolidation - which has negative effects on both oil output (through the reduction of PEMEX’s capex) and construction activity - will be much smaller in 2018 than in the previous two years, according to the 2018 budget bill. Moreover, the moderation of the uncertainty surrounding the Mexican economy will likely curb the slowdown of investment, and thus give some support to the construction sector. An important risk for investment, however, is the proximity of the presidential elections (July 2018), which could affect business confidence down the road. Full Report
  • Supermarket and department store (ANTAD) sales grew 4% y/y, below our forecast and median market expectations (both 4.5%), bringing the 3-month moving average growth rate to 4.5% y/y (from 5% in July). Solid formal employment and the recovery of consumer confidence are supporting consumer spending. Nevertheless, falling real wages (because of higher inflation), the slowdown of consumer credit, and less impulse from remittances converted into pesos are a drag. Looking ahead, we believe the year-over-year growth rate of ANTAD sales will continue to decrease, and improve only in 2018 (when inflation falls substantially). 

Market Developments 

  • GLOBAL MARKETS: Risk on day with equity markets were strong on the green and volatility gauges narrowed in the session. US Treasury yields increased substantially (5-year: +7bps to 1.71%). Global Markets Tracker
  • CURRENCIES & COMMODITIES: Oil prices increased (WTI: +1.08% to USD 48.58/USD) in the session. On a strong dollar day (DXY: +0.67%), LatAm FX (-0.35%) posted losses. The BRL was the regional laggard, closing at 3.1055/USD (-0.59%). Andean pairs also depreciated (COP: -0.54% to 2,923/USD; CLP: -0.38% to 622.74/USD). The MXN was broadly stable at 17.6961/USD (+0.09%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads for the 5-year tenor posted gains in the session. Brazilian country risk reached another recent low, at 180bps (-1bp). In Mexico and Chile, country risk also fell 1bp to 98bps and 54bps, respectively. In Colombia, CDS narrowed 2bps to 113bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Long Brazilian yields widened in the session. In DI futures, while short rates were stable (Jan-18 at7.66%), the Jan-21 widened 6bps to 8.97%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican rates traded range bound in the session. In TIIE swaps, the 1-year inched up 1bp to 7.28% and the 5-year was stable at 6.75%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, the front end of the curve narrowed. In Camara swaps, the 6-month fell 4bps to 2.41%. Chile Rates Tracker In Colombia, the curve bull flattened (1s10s: -3bps). In IBR swaps, the 10-year went down 4bps to 6.10%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, the Copom minutes will be released (Tue.). We expect the Committee to deliver a 75-bp cut in October and a 50-bp cut in December, with the reaching 7.0% in by YE17. On economic activity, the key releases for the week will be July’s retail sales (Tue.) and the Service Sector Survey (PMS) (We.). We expect a 0.1% mom/sa increase in core retail, and a 0.2% decline in the broad segment. For July’s PMS we expect the headline to fall 0.8% year-over-year. Furthermore, BCB will release its monthly activity index (IBC-Br) for July (Thu.). Finally, paper cardboard dispatches (ABPO) for August may be released during the week. 
  • In Chile, the BCCh will hold its September monetary policy meeting (Thu.). In the absence of data surprises, we expect the central bank to hold the policy rate stable at 2.5% and keep a neutral bias. 
  • In Colombia, activity indicators for the month of July will be published (Fri.). We expect industrial production to rise 6.8% year over year. Meanwhile, retail sales likely saw growth of 2.2% in twelve months. Then, Banrep will release the minutes of the monetary policy meeting held in August (Fri.). The minutes may provide the context in which more easing this year would be likely. 
  • In Argentina, the central bank will hold its biweekly monetary policy meeting, to decide on the reference rate (Tue.). We expect the central bank to leave the monetary-policy rate unchanged at 26.25%. Then, the INDEC (the official statistical agency) will publish the National CPI for August (Tue.). Moreover, the INDEC will release the unemployment rate for 2Q17 (Thu.). We expect a reduction in the unemployment rate to 9.0% from 9.3% in the same quarter one year ago. 

Latam Macro Calendar

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




< Back