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LatAm FX weakens on increasing market volatility

August 17, 2017

The volatility gauge VIX increased to 14.73 from 11.74 as of Wednesday.

With information available until 6:30pm Brasilia time

Highlights

  • LatAm FX (-0.75%) underperformed within EM peers. The COP depreciated 0.72% to 2,990/USD. The BRL closed at 3.1753/USD (-0.72%). The MXN was the regional laggard, trading at 17.8414/USD (-1.00%). The CLP posted losses of 0.09% to 645.93/USD. 
  • In Colombia, long rates widened marginally. In IBR swaps, the 1-year was flat at 4.95% and the 5-year increased 2bps to 5.57%. For the remainder of 2017, the curve implies 25bps in rate cuts, matching our call of a 25-bp cut in this month’s meeting (August 31). 
  • The volatility gauge VIX increased to 14.73 from 11.74 as of Wednesday. 
Macro Backdrop

BRAZIL

  • According to BCB, the IBC-Br Activity Index rose 0.5% mom/sa in June. The headline came slightly below market expectations (0.7%), but was affected by a 0.2 p.p. upward revision in the result for May. Relative to the same month in 2016, the IBC-Br fell 0.56% (consensus: -0.5%). The index shows a 0.3% qoq/sa gain in 2Q17, above our GDP forecast for the same quarter (0.0% qoq/sa). 
CHILE
  • At its August monetary policy meeting, the board of the central bank favored keeping the policy rate at 2.5%, in line with market consensus. The press release announcing the decision still holds a neutral bias. Considering no significant change in the growth and inflation outlook from last month, it is likely that the board was again divided regarding the need for additional easing. Last month, Pablo Garcia opted for a rate cut as he saw enough evidence from low inflation to warrant some additional easing. The press release indicated that headline inflation has evolved below the baseline scenario of the 2Q Inflation Report (IPoM). Meanwhile, it noted that inflation expectations have not shown significant deviations.
  • We expect further rate cuts to materialize before yearend. The minutes of the July meeting illustrated that three (out of five) board members are not opposed to the idea of more easing. We expect the revised baseline scenario in the 3Q IPoM (published on September 6) to show reduced inflationary pressures and hence scope for additional easing to ensure that inflation remains on a trajectory toward the 3% target. Thus, we see the policy rate being lowered to 2.0% by yearend, where it would stay for most of next year. Full Report
Market Developments 
  • GLOBAL MARKETS: Equity markets were on the red and volatility gauges widened close to recent highs. DM yields narrowed dragged by US Treasuries (5-year: -3bps to 1.75%). Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities (CRB futures: +0.30%) were on the green as energy stocks posted gains. Oil prices (WTI) rose 0.40% to USD 47.13/USD. Bucking the trend in metallic commodities, iron ore surged 3.44%. In currencies, LatAm FX (-0.75%) underperformed within EM pairs. The CLP posted losses of 0.09% to 645.93/USD and the COP depreciated 0.72% to 2,990/USD. The BRL closed at 3.1753/USD (-0.72%). The MXN was the regional laggard, trading at 17.8414/USD (-1.00%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Credit spreads for the 5-year tenor widened in LatAm. In Brazil, spreads went up to 205bps (+6bps). Colombian and Mexican CDS both increased 3bps to 132bps and 109bps, respectively. Meanwhile, Chilean country risk stood flat at 62bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve bear steepened (Jan19x25: +8bps) as the BRL weakened. Also, the LTN (Oct-18, Oct-19 and Jul-21) and NTN-F (Jan-23 and Jan-27) auctions could also have pressured yields. In DI futures, the Jan-18 inched up 1bp to 8.12% and the Jan-21 widened substantially to 9.51% (+14bps). Brazil Rates Tracker
  • LOCAL RATES - Mexico: Long Mexican yields widened 2bps in the session. In TIIE swaps, while the 6-month stood flat at 7.39%, the 5-year increased 2bps to 6.91%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, traded range bound. In Camara swaps, while the 5-year increased 1bp to 3.35%, the 10-year inched down 1bp to 4.08%. Chile Rates Tracker In Colombia, long rates widened at the margin. In IBR swaps, the 1-year was flat at 4.95% and the 5-year increased 2bps to 5.57%. For the remainder of 2017, the curve implies 25bps in rate cuts, matching our call of a 25-bp cut in this month’s meeting (August 31). Colombia Rates Tracker

Friday Events

  • In Brazil, CNI will release its industrial business confidence for August. 
  • In Chile, the BCCh will publish the National Accounts data for the second quarter of the year and the 2Q17 GDP. At the margin, we expect GDP to gain 0.7% from 1Q17, leading to annual growth of 1.0% year over year (0.1% in 1Q17). Then, the central bank will also publish the 2Q17 current account balance. We expect a USD 1.2 billion deficit, up from the USD 1.0 billion deficit in 2Q16, mainly on the back of a smaller trade balance surplus (USD 1.3 billion in 2Q17, after USD 1.7 billion in 2Q16) as mining production gradually recovers from the 1Q17 strike. 
  • In Colombia, Banrep will present its quarterly inflation report. The central bank will likely implement a downward revision to growth forecasts for this year (currently 1.8%), while confirm the expectation that inflation will accelerate through the remainder of the year. Meanwhile, the report will likely also indicate that room for further easing is narrow, a message already being communicated by various board members. 

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




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