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MXN rallies on Nafta headlines

October 17, 2017

The MXN (+1.27% to 18.7934/USD) outperformed within the major currencies.

With information available until 6:30pm Brasilia time


  • The MXN (+1.27% to 18.7934/USD) outperformed within the major currencies after, according to Bloomberg, Nafta ministers said talks will extend past end-2017 deadline. Elsewhere, the BRL recovered from intraday losses, closing at 3.1605/USD (+0.28%); the CLP was the laggard in the region (-0.62% to 623.28/USD) as copper prices dropped 1.28%; coming back from Monday’s holiday, the COP closed at 2,948/USD (-0.43%).
  • The Mexican curve bull flattened, as the MXN posted gains. The 1-year decreased 2bps to 7.51% and the 5-year went down 10bps to 7.40%. Breakevens also narrowed as the 5-year fell 3bps to 3.81%.

Macro Backdrop

  • According to the IBGE’s monthly services survey (PMS), services sector real revenue fell 1.0% mom/sa in August, the second consecutive decline following three positive months. The year-over-year growth came at -2.4%, between consensus (-2.0%) and our forecasts (-2.8%). Also, 6 out of 12 activities showed positive growth, so the headline came weaker than the diffusion of activities. The highlight was the 4.8% mom/sa decline in “services offered to families”.  “Professional services” (23% of the aggregate index, and the main proxy for 15% of GDP) increased 1.6% mom/sa, partially offsetting the 1.9% decline in July. Despite the weak result, the broad set of indicators remains consistent with positive GDP Growth in 3Q17.


  • In September, consumer confidence completed 21 consecutive months in pessimistic territory (below 0), and remains far from neutral levels. Think-tank Fedesarrollo’s consumer sentiment index came in at -10.3 points, from the -2.1 points one year before (-15.9 in August). Compared to September 2016, there was deterioration in both divisions (expectations and current economic conditions). Consumer expectations are more negative (-7.7 vs. -0.5 one year ago), due mainly to a worsening outlook of the economic performance for the respondent over the next 12-months (-30.6 vs. -12.5 in September 2016). Meanwhile, the current economic conditions evaluation sits at -14.1 points (-4.6 one year ago) as respondents hold a more gloomy evaluation on whether it is an opportune time to purchase household appliances as well as their household performance vs. September last year. In spite of this, a majority of respondents are willing to purchase real estate, which was not the case one year ago. We expect economic growth of 1.6% this year, down from 2.0% for 2016. A recovery to 2.5% next year is expected - aided by higher oil prices, higher global growth, lower inflation and reduced interest rates.
  • Inflation expectations in the month of October showed some moderation, according to the central bank’s monthly survey. The survey shows that the 2017 yearend inflation expectation dropped to 4.07% (previous: 4.20%; our call: 4.2%), while the 1-year horizon expectation now sits at 3.57% (3.63% previously). The 2018 inflation expectation is stable at 3.5% for the sixth consecutive month, while the 2-year horizon inflation expectation inched down to 3.22% (3.27% in September). The core inflation expectation measure (excluding food prices) fell to 3.4% for a 1-year horizon (3.5% previously), while stable near the target at 3.1% for two-years ahead. Meanwhile, a 25-bp rate cut to 5.0% is now expected in January (previously December), with the policy rate still expected to reach 4.5% by May. The expectation is broadly in line with our baseline scenario. The central bank kept the policy rate at 5.25% in September, pausing the 250bps cycle that started last December as inflation edged upwards towards the upper limit of the 2%-4% tolerance range. However, the board has indicated that more easing is likely, with timing the more pertinent question. At the recent IMF meetings, Governor Echavarría noted that he expected the policy rate to stay on hold for a while as the board gauges whether inflation resumes its path towards the 3% target. On the other hand, Finance Minister Mauricio Cardenas highlighted the weak August activity as further justification that more rate cuts are required now.
Market Developments 
  • GLOBAL MARKETS: The USD strengthened (DXY: +0.21%) amid lingering speculation about who the next Fed Chair could be. The GBP weakened 0.50% - even though inflation came in at 3.0% (in line with expectations) - after comments by BoE policymakers renewed doubts over the UK economy and the central bank’s rate expectations. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities were on the red (CRB futures: -0.21%), dragged by agriculture and metals. Firstly, sugar fell 1.06% and soybean weakened 0.63%. Additionally, iron ore dropped 1.86% and copper posted losses of 1.17%. In energy, WTI ended a volatile session broadly stable (+0.13% to 52.21/USD). In FX, currencies under our coverage were mixed. The CLP was the laggard in the region (-0.62% to 623.28/USD) as copper prices dropped 1.28%. Coming back from the prolonged weekend, the COP closed at 2,948/USD (-0.43%). The BRL recovered from intraday losses, closing at 3.1605/USD (+0.28%). Finally, the MXN (+1.27% to 18.7934/USD) outperformed within the major currencies after, according to Bloomberg, Nafta ministers said talks will extend past end-2017 deadline.  FX & Commodity Tracker
  • CDS SPREADS & EXTERNAL BONDS: Credit spreads (5-year) narrowed all across LatAm. In Brazil, Mexico and Colombia, CDS fell 3bps to 178bps, 55bps and 116bps, respectively. In Chile, country risk decreased 1bp to 55bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve bull flattened as services sector growth undershoot market expectations (see Macro Backdrop). The curve was further pressured as the BRL pared daily losses. The Jan-18 fell 2bps to 7.37% - the lowest historical value, and the Jan-21 went down 7bps to 8.92%. Linkers went south by roughly 2-3bps. Brazil Rates Tracker
  • LOCAL RATES - Mexico: The Mexican curve bull flattened as the MXN posted gains. The 1-year decreased 2bps to 7.51% and the 5-year went down 10bps to 7.40%. Breakevens also narrowed as the 5-year fell 3bps to 3.81%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: Chilean rates were mixed in the session. In Camara swaps, while most rates traded range bound, the 1-year fell 3bps to 2.43%. Chile Rates Tracker In Colombia, markets reopened after Monday’s holiday. The IBR curve steepened as the short end inched down 1bp and the long end widened 2-3bps. Colombia Rates Tracker

Upcoming Events

  • In Brazil, October´s IPCA-15 consumer inflation preview will be released (Fri.). We forecast a 0.35% monthly rise, with year-over-year inflation increasing to 2.7% from 2.56%. On economic activity, September’s CAGED formal job creation may come through. We expect a net creation of 62k jobs (stability in seasonally adjusted terms). Moving forward, BCB will release its monthly activity index (IBC-Br) for August (Wed.). On fiscal accounts, September’s tax collection will be released throughout the week, for which we forecast BRL 103.5 billion, or a 6.6% y/y increase in real terms. Finally, the Lower House Constitution and Justice Committee (CCJ) is expected to vote the charges against President Temer between Tuesday and Thursday. Voting in the Lower House floor is expected to take place in the following week, which starts on October 23. 

  • In Mexico, INEGI will announce September’s unemployment rate (Fri.). We expect the unemployment rate to post 3.6%. 

  • In Chile, the BCCh will hold its monthly monetary policy meeting (Thu.). We expect the board to keep the rate unchanged at 2.5%. 

  • In Colombia, the trade balance for August will be published (Wed.). We expect a trade deficit of USD 928 million, broadly stable from one year before (USD 991 million deficit). 

  • In Argentina, the BCRA will publish its quarterly monetary policy report (Wed.). We expect the report to shed light on the monetary policy stance given the challenges to meet the inflation target range in 2017 and 2018. Then, the fiscal accounts for September will see the light (Fri.). We expect the government to meet its official target deficit of 4.2% of GDP in 2017. 

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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