Itaú BBA - Nafta headlines weigh on the MXN

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Nafta headlines weigh on the MXN

October 4, 2017

Despite the weak dollar session, the MXN depreciated 0.31% to 18.2670/USD ahead of the fourth round of Nafta renegotiation in Washington, DC (October 11-15).

With information available until 6:30pm Brasilia time
 

Highlights

  • Despite the weak dollar session, the MXN depreciated 0.31% to 18.2670/USD ahead of the fourth round of Nafta renegotiation in Washington, DC (October 11-15). Elsewhere, LatAm FX posted gains. The COP outperformed its peers, closing at 2,938/USD (+0.52%). Then, the BRL appreciated 0.28% to 3.1349/USD and the CLP posted gains of 0.28% to 631.63/USD.
     

  • In rates, the Brazilian curve had a minor flattening, with the belly widening 1-3bps and the long end tightening. In DI futures, the Jan-19 went up 2bps to 7.31% and the Jan-25 went down 1bp to 9.90%.

Macro Backdrop

MEXICO
  • Gross fixed investment – currently the weakest component of domestic demand – surprised to the downside in July, mainly dragged by the fiscal consolidation. The monthly GFI indicator fell 2.5% year-over-year, undershooting our forecast and median market expectations (0.9% and 1.4% contractions, respectively). According to calendar-adjusted data reported by the statistics institute, gross fixed investment also contracted 2.5% year-over-year, with the three-month moving average contraction rate standing at 0.7% year-over-year (unchanged from June). Seasonally-adjusted gross fixed investment fell 1.5% month-over-month in July, but quarter-over-quarter annualized growth actually increased to 1.9% (from 1.2% qoq/saar in June).
  • The outlook for investment is clouded by negative risks, so we expect growth to remain weak in 2017. Year-over-year growth will likely continue in negative terrain, while the sequential improvement observed recently will reach a peak soon (and stay subdued thereafter). In the short-term, fiscal consolidation and uncertainty associated to Nafta (which intensified recently, with the next renegotiation round – scheduled to October 11 – expected to address some of the thorniest issues) will probably continue hurting investment. Moreover, the proximity of the presidential elections could put investment decisions on hold, depending on the evolution of the polls. On the positive side, the solid US economy encourages capital expenditures in Mexico, so this can act as a cushion. Looking into 2018, we believe that the uncertainty associated to the presidential elections will be partly offset by a number of factors: reconstruction works (in response to the earthquakes), a less severe fiscal drag (budget cuts proposed in 2018 budget bill are much smaller compared to those in the 2017 budget), and a successful conclusion of Nafta renegotiation in 1Q18 (by successful we mean an acceptable compromise, favoring the US but without transformational implications for the Mexican economy). Full Report

ARGENTINA

  • Analysts maintained their inflation forecasts for 2017 but again adjusted slightly up those for 2018 according to the latest Central Bank survey of expectations. Analysts forecast now higher monetary policy rates (7-day repo) by end-2017 and 2018, although they continue to expect some easing before the end of this year. Growth forecasts have remained unchanged for both years. Inflation expectations for 2017 stood at 22.0%, similar to our forecast, so survey participants do not expect the central bank to meet the target set for this year (12-17%).
  • As the central bank shows commitment with its ambitious inflation targets and inflation remains sticky, survey participants adjusted once more their expectations for the year-end reference rate, to 25.5% (from 24.75% in September and 23.75% in August). We no longer expect changes in the reference rate this year –currently at 26.25%- as the central bank reiterates it will pursue a stronger disinflation of core items. The president of the BCRA, Federico Sturzenegger, affirmed recently that there is no room, at all, to ease the monetary policy in the coming months. The survey showed that participants now expect a reference rate at 19.5% for 2018 (up from 18.25% in August and 17.5% in July). We expect the policy rate at 20% in December 2018. Full Report

GLOBAL

  • Commodities Monthly Review: Reality check for metal prices. After a two-month rally, metal prices dropped in September, in line with our scenario. We maintain our year-end iron ore price forecast at USD 60/mt. For copper prices, we slightly raised our year-end forecast to USD 5,900/mt (USD 5,700/mt, previously), partially incorporating the recent increase. Nonetheless, we still forecast a 7.7% decline in ICI Metals as the Chinese economy continues to decelerate in 4Q17. Full Report
Market Developments 
  • GLOBAL MARKETS: Ahead of the US payroll report, the USD was broadly stable vis-à-vis the EUR and the JPY and US treasuries traded range bound. Global Markets Tracker
  • CURRENCIES & COMMODITIES: In commodity space, oil prices weakened for the third consecutive session (WTI: -1.02% to 50.22/USD). According to EIA’s report, US crude exports climbed to a record 2 million barrels a day last week. On a weak dollar session, LatAm pairs posted gains. The COP outperformed its peers, closing at 2,938/USD (+0.52%). Then, the BRL appreciated 0.28% to 3.1349/USD and the CLP posted gains of 0.28% to 631.63/USD. Bucking the trend, the MXN depreciated 0.31% to 18.2670/USD on Nafta-related headlines. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads (5-year) went down, on average. In Brazil, CDS fell 2bps to 186bps and in Chile spreads went down 1bp to 55bps. In Mexico and Colombia, country risk was stable at 102bps and 113bps, respectively. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve had a minor flattening, with the belly widening 1-3bps and the long end tightening. In DI futures, the Jan-19 went up 2bps to 7.31% and the Jan-25 went down 1bp to 9.90%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: The Mexican curve bear steepened (1s15s: +4bps) in the session. In TIIE swaps, the 1-year inched up 1bp to 7.31% and the 10-year widened 4bps to 7.16%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: Most Chilean rates widened 2-3bps in the session. In Camara swaps, the 9-month increased 2bps to 2.52% and the 5-year went up to 3.58% (+3bps). Chile Rates Tracker Long Colombian yields tightened. In IBR swaps, while very short rates were stable (6-month at 4.98%), longer ones went south (18-month: -2bps to 4.88%; 8-year: -4bps to 5.84%). Colombia Rates Tracker

Upcoming Events

  • In Brazil, all eyes will be on the IPCA consumer inflation (Fri.). We project September’s IPCA to register a 0.10% monthly increase, with year-over-year inflation stable at 2.5%. In addition, Anfavea’s auto production will be released (Thu.).
  • In Chile, the BCCh will publish the GDP proxy (Imacec) for the month of August (Thu.). We expect the GDP proxy IMACEC to grow 0.5% sa from July, leading annual growth of 2.1% (2.8% in June). Later, INE will publish nominal wage growth for August (Thu.). INE will also publish inflation for the month of September (Fri.). In August, consumer prices expanded 0.2% month over month, so annual inflation came in at 1.9%, below the 2- 4% tolerance range. We expect consumer prices to have gained and atypically low 0.2% from August, leading to an annual inflation of 1.9% in the month.
  • In Colombia, the National Institute of Statistics will release the September inflation print (Thu.). We expect consumer prices to gain 0.18% from August, taking annual inflation above the target range to 4.12%.

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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