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LatAm FX weakens on external headwinds

October 9, 2017

Liquidity in global markets was thin due to the holiday in the US (Columbus Day).

With information available until 6:30pm Brasilia time


  • Liquidity in global markets was thin due to the holiday in the US (Columbus Day). LatAm currencies posted losses (-0.80%), underperforming EM FX. The BRL was the regional laggard (-0.97% to 3.1863/USD). The MXN (-0.84% to 18.6867/USD) and the COP (-0.50% to 2,954/USD) also weakened. Finally, the CLP closed at 633.40/USD (-0.12%).

  • Short Mexican yields narrowed somewhat as CPI came in below the floor of expectations (see Macro Backdrop). In TIIE swaps, the 1-year fell 2bps to 7.31%.

  • Markets were also closed in Chile, due to a national holiday.

Macro Backdrop

  • Inflation expectations declined to 4.02% for 2018. According to Focus survey, IPCA inflation expectations slightly increased to 2.98% (+3bps) for 2017, virtually in line with our forecast (3.0%), declined to 4.02% (-4bps) for 2018, and did not change for 2019 (at 4.25%). Furthermore, 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 remained flat for 2017 and 2019 (at 0.70% and 2.50%, respectively), while it had increased 5bps to 2.43% for 2018. Finally, the BRL remained flat for 2017 and 2018: at 3.16/USD and 3.30/USD, respectively, and marginally appreciated for 2019 to 3.35/USD (from 3.36/USD). See BCB Report
  • The Serasa Experian Index for Retail Activity increased 1.4% mom/sa in September (our seasonal adjustment), more than offsetting last month’s decline. The index shows a gradual increase year-to-date, following stable figures through 2016 and a steep decline in 2015. The breakdown shows a widespread improvement, all the sectors posted gains (in month-over-month seasonally adjusted terms). The highlight was “furniture and appliances” (4.1% mom/sa). Combining with other indicators, our preliminary forecasts for September core and broad retail sales stand at 1.2% and 1.7% mom/sa, respectively.
  • CPI inflation likely began a downward trend in September, showing more benign price dynamics across core and non-core components. CPI inflation came at 0.31% month-over-month, below our forecast (0.39%) and median market expectations (0.43%). The main source of inflationary pressure was energy prices (up by 1.73%), which added 17bps to the monthly CPI print. This was largely the outcome of adverse weather; as hurricane Harvey disrupted refining activities in the US and, thus, increased Mexico’s fuel import prices. The other important driver of inflation in September was education (given the beginning of the school year), whose fees climbed 2.37% and contributed 13bps to monthly CPI inflation. Conversely, non-core food prices fell (by 0.06%), after spiking over the past months. Headline inflation fell to 6.35% year-over-year (from 6.66%), while core inflation decreased to 4.80% (from 5%) during the same period. Overall, we see more benign price dynamics. It is quite telling to note that in September the difference between the CPI inflation print and the 5-year median variation has turned negative, from an average of 33bps in the first eight months of 2017. We expect this difference to stay negative in the next months.
  • We expect the downward trend of inflation to accentuate in the next months, falling to 5.7% by the end of 2017. The appreciation of the MXN observed so far this year (10% year-to-date) will be the leading driver for disinflation, with a benign impact on core tradable prices. Moreover, agricultural inflation (which is volatile and still running at an abnormally high level) will likely continue to show a reversion in the coming months (as it did in the first half of September). We highlight that the recent earthquakes do not seem to have had a material impact on Mexico’s inflation. Full Report
Market Developments 
  • GLOBAL MARKETS: Liquidity in global markets was thin due to the holiday in the US (Columbus Day). The TRY sold off (-2.95%) after the US and Turkey suspended the processing of non-immigrant visa services from each other. The risk off spilled over EM pairs (-0.13%). Global Markets Tracker
  • CURRENCIES & COMMODITIES: In Commodities, oil prices slightly strengthened (WTI: +0.48% to 49.89/USD). Grains were the main drag in the session (wheat: -1.69%, corn: -0.14% and soybean: -0.57%). LatAm FX posted losses, likely dragged by the TRY drop. The BRL was the regional laggard (-0.97% to 3.1863/USD). The MXN (-0.84% to 18.6867/USD) and the COP (-0.50% to 2,954/USD) also weakened. Finally, the CLP closed at 633.40/USD (-0.12%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm Credit spreads (5-year) were stable in the session. In Brazil, Mexico, Chile and Colombia spreads stood flat at 186bps, 107bps, 56bps and 115bps, respectively. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The long end of the Brazilian curve widened as the BRL weakened. While the front end was flat (Jan-18 at 7.44%), long rates increased by 4-6bps (Jan-21: +5bps to 8.97%). The breakevens curve went north 3-4bps. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Short Mexican yields narrowed as CPI came in below the floor of expectations (see Macro Backdrop). In TIIE swaps, the 1-year fell 2bps to 7.31% whereas the 7-year was stable at 7.14%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, markets were closed due to a national holiday. In Colombia, markets traded with very thin liquidity as it is holiday in the US. In IBR swaps, short rates inched down 1bp (1-year: -1bp to 4.79%) while longer ones were stable. Colombia Rates Tracker

Upcoming Events

  • In Brazil, the key release for the week will be August’s retail sales (Wed.). We expect a flat reading in core retail sales (month-over-month, seasonally adjusted), and a 0.4% increase in the broad segment. Then, the Systematic Survey of Agricultural Production for September, also from IBGE, will be released (Tue.). Moreover, traffic of heavy vehicles (ABCR) and paper cardboard dispatches (ABPO) for September, two important coincident indicators for industrial production, may be released during the week. Finally, the second round of charges against President Temer will continue to be discussed in the Constitution and Justice Committee (CCJ) as the final report is likely to come out to the committee, although low quorum due to the 12 October Holiday may postpone it. 

  • In Mexico, the National Association of Department Stores and Supermarkets (ANTAD) will announce September’s same-store-sales (Tue.). We expect ANTAD sales to slow down to 3% year-over-year (from 4% in August), dragged by the temporary drag of the earthquakes. Moreover, INEGI will publish August’s industrial production (Thu.). We estimate that industrial production fell by 0.6% year-over-year. Furthermore, Banxico will publish the minutes of the latest monetary policy meeting (Thu.). 

  • In Chile, the central bank will publish the trade balance for September (Tue.). We expect a trade surplus of USD 750 million (USD 213 million surplus one year ago), leading to a surplus of USD 1.6 billion in 3Q17 (USD 53 million deficit in 3Q16). 

  • In Colombia, Banrep will publish the minutes of the September monetary policy meeting (Fri.). The minutes will likely express that the real interest rate is now near to neutral and any additional easing would likely come only once inflation resumes a downward trajectory towards the 3% target. 

  • In Argentina, the BCRA will hold its biweekly monetary policy meeting, to decide on the reference rate (Tue.). We do not expect changes in the reference rate this year as the central bank reiterates that it is committed to its ambitious inflation targets. Moreover, the INDEC will publish the National CPI for September (Thu.). According to private estimates, headline inflation decelerated to 1.3% month over month in September, while the core measure stood at 1.4% mom. 

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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