Itaú BBA - Most of LatAm FX weaken on signs of a shift in Chinese economic policy

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Most of LatAm FX weaken on signs of a shift in Chinese economic policy

March 6, 2017

Metals posted losses after the Chinese GDP policy shift to “around 6.5%”.

With information available until 6:30pm Brasilia time

Highlights

  • Commodities traded lower in the session, as metals posted losses after the Chinese GDP policy shift to “around 6.5%”. In LatAm FX, the currencies under our coverage depreciated, expect for the COP. The CLP weakened 0.44% to 660.72/USD. The MXN posted losses of 0.48% to 19.60/USD. The COP traded 0.33% higher to 2,971.88/USD. The BRL was the regional laggard, depreciatiating 0.70% to 3.1375/USD. 
  • Brazilian rates traded lower in the session, as the weekend news flow indicated the government will begin tougher push to guarantee support on the pension reform. In DI Futures, the Jan-19 decreased 6bps to 9.73%. 

Macro Backdrop

BRAZIL
  • GDP expectations for 2017 revised marginally higher. According to BCB’s Focus survey, inflation expectations did not change (2017: 4.36%, 2018: 4.50%), remaining below the Central Bank’s target in the yearend. The median of professional forecasters’ expectations for the Selic policy rate stood flat at 9.25% for YE17 and at 9.00% for YE18. Also, the market left unchanged its expectations for the BRL (2017: 3.30/USD, 2018: 3.40/USD). GDP growth expectations marginally changed to the upside in 2017 to 0.49% (+1 bps) and 2018 to 2.39% (+2 bps), while in 2019 stood flat at 2.50%. See BCB Report
  • Retail activity came in stronger than expected in February. According to Serasa data and our calculation, retail activity increased 1.6% m/m in February, stronger than expected. Along with other economic activity data, we changed our forecast for core retail sales (PMC) in February to 0.7% m/m (from -0.3%). For January, we forecast a 0.2% m/m increase in core retail sales and -0.9% for broad retail sales.
  • Macro Vision: when to cut the inflation target? By the time the decision about the 2019 inflation target is made, in June this year, there may be a window of opportunity to begin the convergence of the Brazilian inflation target towards international standards. The opening of this window of opportunity will depend on three factors: progress of pension reform (signaling an effective fiscal adjustment), the evolution of the external scenario and the decline in current inflation in Brazil. We believe that, by mid-year, there will be greater clarity on these issues. Even with an economic recovery, the labor market gap will continue to exert disinflationary pressure, keeping inflation in a downward trend. Thus, if these three factors materialize, it will be possible for the authorities to reduce the inflation target with no output costs, i.e., without having to act so as to delay or reduce the pace of economic recovery. Full Report
MEXICO
  • Banxico held the first auction of the USD 20 billion foreign exchange hedging programme. The central bank assigned the full USD 1 billion offer it had announced. 
CHILE
  • The monthly GDP proxy (Imacec) came in above market expectations, but remains weak. Imacec grew 1.7% y/y, above our expectations and consensus (both at 1.0%). The 1.8% y/y expansion in non-mining activity (+1.6 p.p.) led the headline growth, lifted by commerce and services. Mining activity grew 0.9% y/y (+0.1 p.p.). Corrected for calendar and seasonal factors, activity expanded 1.5% from last year. At the margin, activity was lifted by mining activity. From December, the seasonally adjusted index expanded 0.4%, led by the 3.0% m/m gain in mining (+0.26 p.p.). This comes in contrast with sectoral activity data released last week, which pointed at a weak mining performance in January. Meanwhile, non-mining activity grew by 0.2% m/m (+0.16 p.p.). 
  • We expect GDP growth of 1.5% for 2016, with a recovery to 2.0% this year. Higher copper prices, low inflation and interest rates cuts would outweigh weak job creation and less fiscal support this year. The new national accounts, in which mining (a drag to activity) weighs less, is an upside risk to our forecast. On the other hand, we note that activity in February (and likely March, too) would be weak as a labor strike at the largest copper mine persists. Additionally, uncertainty over the outcome of presidential elections could be a blow to confidence. Full Report
  • According to Adimark’s February public opinion survey, former president Sebastián Piñera improved on his previous polling numbers. In the previous month, Alejandro Guillier surpassed Piñera for the first time since voting intentions for the November election started last August. However, one month later, Guillier dropped three percentage points to 25% (his first monthly decline), while Piñera increased two percentage points to 29%. Nevertheless, there is still around a quarter of undecided respondents. Hence, this group of voters will remain a key player in the outcome of the presidential race. 
COLOMBIA
  • Falling inflation, in spite of tax hikes. Prices increased 1.01% m/m in February, down from 1.28% one year before, below market expectations (1.15%) and our forecast (1.30%). Most major categories posted gains in the month, with education (+6.78% m/m, 0.42 p.p.) and food prices (+0.71% m/m, 0.21 p.p.) leading the monthly increase. The gain in food prices came below the 1.44% recorded one year ago, as past supply-side shock fades. However, non-tradable prices accelerated to 1.66% m/m (one year prior: 1.44%) as did tradables (to 1.11% from 0.75%), likely reflecting the implementation of the VAT increase in February. 
  • The 5.18% y/y inflation recorded in February (January: 5.47%) - the lowest since August 2015 (4.74%) - continues to edge towards the central bank’s 2%-4% tolerance range. Food price inflation was still the main contributor to 12-month inflation at 5.21% y/y (+1.55 p.p.), but continues to fall (January: 5.97%) from the 15.71% high in July 2016. Housing related costs (+4.55% y/y, +1.39pp), was the next main contributor to inflation in the month. Excluding food prices, inflation decelerated to 5.17% from 5.26% January. Meanwhile non-tradable (5.06%) and tradable inflation (5.75%), both excluding food and regulated prices, picked up from January (4.83% and 5.37%, respectively). Our diffusion index continues to moderate but only gradually, showing that inflation remains sticky. Going forward, we expect the disinflationary process to advance amid a firmer currency and weak demand. Still, we see inflation at 4.3% this year, above the upper bound of the target. Full Report
Market Developments 
  • GLOBAL MARKETS: The Chinese government delivered a hawkish shift in policy by lowering 2017 growth targets for GDP and credits, consistent with a stronger emphasis on reforms and financial stability. The GDP was adjusted to the target of “around 6.5% y/y; in practice try to achieve a better result”. We believe the government signals that will not fasten reforms beyond its plan (and lower short term growth) if the economy is growing above 6.5%. Treasuries increased, as the 5-year increased 1bp to 2.02% and the 10-year went up 2bps to 2.49%. The Fed funds futures implied probability of a hike this month rose to 98%, from 94% as of March 3. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities traded lower in the session, as metals posted losses after the Chinese policy shift. Oil prices (WTI) decreased to USD 53.22/bbl (-0.21%), iron ore fell 2.64% and copper went down 1.63%. In LatAm FX, the currencies under our coverage depreciated, expect for the COP. The CLP weakened 0.44% to 660.72/USD. The MXN posted losses of 0.48% to 19.60/USD. The COP traded 0.33% higher to 2,971.88/USD. The BRL was the regional laggard, depreciatiating 0.70% to 3.1375/USD. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Credit spreads for the 5-year tenor traded marginally lower across LatAm. Chilean and Brazilian spreads stood flat at 71bps and 218bps, respectively. Colombia traded at 132bps (-1bp). In Mexico, they also went down 1bps, to 130bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Brazilian rates traded lower in the session, as the weekend news flow indicated the government will begin a tougher push to guarantee support on the pension reform. In DI Futures, the Jan-19 decreased 6bps to 9.73% and the Jan-21 went down 4bps to 10.03%, as the belly part of the curve tightened the most. For the full year, the curve sees 288-331bps in rate cuts, pending on the term premium estimate. Brazil Rates Tracker
  • LOCAL RATES - Mexico: The Mexican curve widened 2bps on average. In TIIE swaps, the 1-year increased 2bps to 7.18% and the 10-year went up 1bp to 7.72%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: Long Chilean rates traded higher in the session as Imacec index grew more than expected (see Macro Backdrop). Chile Rates Tracker In Camara swaps, while the 1-year stood flat at 2.95%, the 10-year went up 5bps to 4.23%. In Colombia, IBR swaps were mixed. Very front end narrowed (1-year: -5bps to 6.20%) while the belly traded range bound (4-year: flat at 5.79%) and long end higher (10-year: +2bps to 6.51%). Colombia Rates Tracker

Upcoming Events

  • In Brazil, 4Q16 GDP will be the week’s main economic release (Tue.). We estimate a contraction of 0.6% q/q seasonally adjusted. If our estimate is correct, GDP declined 3.5% in 2016. Moreover, January's industrial production will hit the wires (Wed.). We expect production to be broadly stable in the month, with a 0.1% m/m increase seasonally adjusted. Then, February’s vehicle production (Anfavea) will be released (Tue.), and we expect it to reach 190k. Moving to the inflation front, February’s IPCA will come out (Fri.), for which we forecast a 0.45% m/m rise. In annual terms, inflation will set back to 4.9% from 5.35% in January, further consolidating its downward trend.
  • In Mexico, INEGI will announce February’s CPI inflation (Thu.). We expect a 0.48% m/m variation. Assuming our forecast is correct, headline inflation would rise from 4.72% year-over-year in January to 4.76% year-over-year in February. 
  • In Chile, the central bank will publish the trade balance for February (Tue.). We forecast a USD 650 million surplus (USD 720 million in January), taking the rolling 12-month trade balance to USD 4.3 billion (USD 4.6 billion in 2016). Later, the National Institute of Statistics (INE) will publish nominal wage growth for January (Tue.). We expect the current disinflation and the loosening labor market to limit wage growth ahead. Moreover, INE will publish inflation data for February (Wed.). We expect prices to gain 0.3% from January (+0.5% in January), but acknowledge upside risks. 
  • In Colombia, the monetary policy meeting minutes from February will be published (Fri.). The minutes will likely confirm that the most likely scenario has the policy rate falling in coming months, but the timing will be data dependent.

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa



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