Itaú BBA - MXN rallies on FOMC’s guidance and reduced Nafta renegotiation jitters

Latam FI Strategy Daily

< Back

MXN rallies on FOMC’s guidance and reduced Nafta renegotiation jitters

March 15, 2017

MXN outperforms as the US wants to use higher rules of origin to "develop a mutually beneficial regional powerhouse".

With information available until 6:30pm Brasilia time

Highlights

  • The Fed guidance was dovish compared to our expectation and the range of potential scenarios. In LatAm FX, currencies under our coverage appreciated, except for the CLP. The COP posted gains of 0.90% to 2,970.56/USD. The CLP depreciated 0.23% trading at 670.53/USD. The BRL strengthened to 3.1037/USD (+2.11%). The MXN outperformed (+2.32% to 19.22/USD) further boosted by Director of the US National Trade Council Peter Navarro’s comments. He said “we have a tremendous opportunity, with Mexico in particular, to use higher rules of origin to develop a mutually beneficial regional powerhouse where workers and manufacturers on both sides of the border will benefit enormously”.
  • In rates, Brazilian yields narrow strongly after the FOMC decision. In DI Futures, the Jan-18 went down 8bps to 9.98% and the Jan-21 decreased 13bps to 9.94%, going back below the 10% bound. The front end fully prices in 100-bp cut for the April meeting and another 84bps cut in June. For the full year, the curve sees 290-332bps in rate cuts, pending on the term premium estimate. In CDS, Brazilian spreads decreased the most in the region, to 220bps (-14bps), partly reflecting Moody’s outlook upgrade (see Macro Backdrop).

Macro Backdrop

BRAZIL
  • Moody's Investors Service upgraded Brazil's outlook to stable from negative and affirmed its issuer rating at Ba2. According to the agency, the decision follows its expectation that the “downside risks reflected in the negative outlook are abating” and macroeconomic conditions are stabilizing, “with the economy showing signs of recovery, inflation falling and the fiscal outlook clearer”. Furthermore, Moody’s cites indications that the functioning of Brazil's policy framework is improving and the strength of its institutions recovering, supporting planned implementation of structural fiscal reforms. Finally, risk of contingent liabilities from government-related entities “has been significantly reduced”. Namely, risks related to financial support to the state-owned oil company have diminished, while the fiscal cost of debt relief provided to states remains contained. 
  • After closing, the Central Bank called a roll over auction of up to 10,000 contracts on March 16. If this pace is maintained, the BCB will let USD 4.2 billion expire (USD 9.7 billion due in April). 
COLOMBIA
  • After reaching an all-time historical low in January, consumer confidence posted the lowest February on record. Think-tank Fedesarrollo's index came in at -24.3 points (0 is neutral), lower than the -21.0 points one year before (January: 30.2). The weaker confidence follows the approval of the increased sales tax at the end of last year. The worsening in the indicator over the last twelve months comes from a more negative perception of whether a household is economically better off than one year earlier (-28.8 points vs. -18.6 points in February 2016). Meanwhile, economic expectations that a household will be economically better off in one year were less optimistic. The decision by the central bank to cut the policy rate last month considered the decline in consumer confidence as a key factor behind the decision. Banrep will take into account the confirmation of depressed consumer sentiment and the recent deterioration of private consumption. We expect a consecutive rate cut at this month’s meeting, meanwhile we acknowledge downside risks to our expected activity growth of 2.3% (2016: 2.0%).
  • Gerardo Hernández has been sworn in as the replacement of Gustavo Cano on the board of the central bank. The board will now be fully represented by seven members at this month’s meeting, eliminating the possibility of a stalemate (which existed last month). The delayed introduction of Hernández to the board was due to his former position as the banking supervisor which called for a quiet period between job swaps. Hernández is a lawyer with specialization in administrative law. He also undertook graduate studies in economics at the New School for Social Research in New York and enrolled in central banking studies at the International Monetary Fund. Mr. Hernández is no stranger to the central bank as he previously worked as secretary to the board and was the bank’s executive manager. The board of the central bank will experience a further change in May when José Antonio Ocampo replaces César Vallejo. With activity disappointing, consumer confidence staying pessimistic and inflation and inflation expectations retreating towards the 2%-4% tolerance range, we see Banrep taking the policy rate to 5.5% by yearend (currently 7.25%).

Market Developments

  • GLOBAL MARKETS: Risk-on day with equity markets strong on the green and Treasuries tightened as the FOMC guidance was dovish compared to our expectation and the range of potential scenarios. The Fed raised its policy rate by 25bps to 0.75-1.00% and the distribution of the dots remained largely consistent with three rate hikes in 2017. Although the Fed has been cautious, its monetary policy is conditional to the economic outlook, which in our view is tilted to the upside. The US economic outlook keeps us comfortable that the Fed will end up delivering 4 hikes in both 2017 and 2018 (only an unforeseen shock would prevent, in our view, a hike in June). For the 5-year, Treasuries decreased 12bps to 2.01% and for the 10-year they fell 10bps to 2.50%. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Rebound in oil and commodities prices that initiated post the API number Tuesday’s night. Data from the U.S. Energy Information Administration (EIA) showed US crude stocks fell last week, dropping after nine consecutive increases. Brent increased 2.06% to USD 51.97/bbl. In LatAm FX, currencies under our coverage appreciated, except for the CLP. The COP posted gains of 0.90% to 2,970.56/USD. The CLP depreciated 0.23% trading at 670.53/USD. The BRL strengthened to 3.1037/USD (+2.11%). The MXN outperformed (+2.32% to 19.22/USD) further boosted by Director of the US National Trade Council Peter Navarro’s comments. He said “we have a tremendous opportunity, with Mexico in particular, to use higher rules of origin to develop a mutually beneficial regional powerhouse where workers and manufacturers on both sides of the border will benefit enormously”. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads for the 5-year tenor decreased across the board. Colombian spreads decreased 8bps to 133bps and Mexican fell 9bps to 132bps. Chilean country risk went down 5bps to 71bps. Brazil CDS decreased the most, to 220bps (-14bps). External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Brazilian yields narrow strongly after the FOMC decision. In DI Futures, the Jan-18 went down 8bps to 9.98% and the Jan-21 decreased 13bps to 9.94%, going back below the 10% bound. The front end fully prices in 100-bp cut for the April meeting and another 84bps cut in June. For the full year, the curve sees 290-332bps in rate cuts, pending on the term premium estimate. Brazil Rates Tracker
  • LOCAL RATES - Mexico: The Mexican curve substantially bull flattened, tracking the US Treasuries movement. In TIIE swaps, the 1-year fell 7bps to 7.12% and the 10-year decreased 12bps to 7.67%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, rates had a quiet session. In Camara swaps, most yields stood flat (1-year: 2.93%), while some edged higher (5-year: +1bp to 3.73) and some inched down (6-month: -2bps to 2.96%). Chile Rates Tracker In Colombia, IBR swaps traded lower again. The 2-year fell 11bps to 5.57% and the 10-year narrowed 5bps to 5.75%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, February’s Industry employment data for the state of Sao Paulo (FIESP) will be in focus (Thu.). In recent months, employment has shown more modest marginal declines. Then, industrial business confidence (CNI) for March will be released (Fri.). In the previous month, confidence increased 6.7%, representing a second relevant gain at the margin. We expect the current upward trend in industrial confidence to continue ahead. 
  • In Chile, the central bank of Chile will hold the March monetary policy meeting (Thu.). We expect the board to cut the policy rate by 25bps to 3.0% and to retain the easing bias. 
  • In Colombia, the trade balance for the month of January will be published (Fri.). We expect a trade deficit of USD 815 million, smaller than the USD 1.5 billion deficit recorded one year ago. Moreover, the central bank may publish the current account balance for 4Q16. We expect a USD 2.2 billion deficit (4Q15: USD 4.1 billion deficit), as the trade balance of goods improved from one year ago on the back of recovering commodity prices and a weakening domestic demand.

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa



< Back