Itaú BBA - Nafta-related worries weigh on Mexican assets

Latam FI Strategy Daily

< Back

Nafta-related worries weigh on Mexican assets

October 16, 2017

The MXN is depreciating (-0.60% to 19.0257/USD – weakest level since May) amid market concerns over the fate of Nafta.

With information available until 6:30pm Brasilia time

Highlights

  • The MXN is depreciating (-0.60% to 19.0257/USD – weakest level since May) amid market concerns over the fate of Nafta, given the proposals the US is pushing in the fourth round of negotiations. Hence, Mexican yields widened, pressured by a weaker MXN and also tracking higher US Treasuries. The 1-year increased 5bps to 7.51% and the 5-year went up 9bps to 7.30%.
  • Elsewhere in LatAm FX, the BRL weakened substantially, closing at 3.1694/USD (-0.74%). Bucking the trend, the CLP (+0.68% to 619.41/USD) outperformed within EM FX as the copper extended substantial gains for the sixth consecutive session (+3.35%).
  • Markets were closed in Colombia and Argentina due to national holidays (Columbus Day).

Macro Backdrop

BRAZIL
  • GDP growth expectations increased to 2.50% for 2018. According to Focus survey, GDP growth expectations increased 2bps for 2017 (to 0.72%) and 7bps for 2018 (to 2.50%), and flat at 2.50% for 2019. Year-end Selic expectations remained flat for the three years horizon, at 7.00% for 2017 and 2018, and 8.00% for 2019. Inflation expectations marginally increased to 3.00% (+2bps) for 2017, in line with our call, and remained flat at 4.02% for 2018 and 4.25% for 2019. Finally, the BRL was virtually unchanged for 2017 at 3.15/USD (from 3.16/USD), and did not change for 2018 and 2019: at 3.30/USD and 3.35/USD. See BCB Report

Market Developments 
  • GLOBAL MARKETS: US Treasury yields rose (5-year: +3bps to 1.93%) and the USD strengthened at the margin (DXY: +0.23%) after Fed Chair Yellen’s remarks at a banking conference on Sunday. According to the WSJ, she said her “best guess” was that inflation would pick up next year as the labor market strengthens further. Ms. Yellen also suggested that she remains inclined to continue raising interest rates. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities were mixed. In energy, WTI rose 0.79% to 52.14/USD. Meanwhile, agriculture commodities were on the red (corn: -0.64%; soybean: -0.92%; sugar: -1.60%). In metals, copper prices touched a three-year high as amid upbeat Chinese data (+3.35%). In FX, the BRL weakened substantially, closing at 3.1694/USD (-0.74%). Then, the MXN is depreciating (-0.60% to 19.0257/USD – weakest level since May) amid market concerns over the fate of Nafta, given the proposals the US is pushing in the fourth round of negotiations. Bucking the trend, the CLP (+0.68% to 619.41/USD) outperformed within EM FX as the copper extended substantial gains for the sixth consecutive session (+3.27%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads (5-year) were stable on average. In Brazil and Chile, CDS was flat at 181bps and 56bps, respectively. In Mexico, country risk increased 3bps to 117bps as the MXN depreciated. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve steepened on the back of a weaker BRL. Very short DI futures were stable (Jan-18 at 7.39%) while the belly increased 1-2bps (Jan-19: +2bps to 7.29%) and the long end widened 5-6bps (Jan-25: +6bps to 10.03%). Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican yields widened, tracking higher US treasuries and a weaker MXN. The 1-year increased 5bps to 7.51% and the 5-year went up 9bps to 7.30%. Breakevens also widened as the 5-year went up 4bps to 3.83%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, the stronger CLP managed to narrow yields, despite the rising US treasuries. In Camara swaps, the 5-year fell 2bps to 3.52%. Chile Rates Tracker In Colombia, markets were closed due to a national holiday.

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). Also, August’s Service Sector Survey (PMS) will be released (Tue.), for which we expect a 2.8% year-over-year decline. 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, think-tank Fedesarrollo will release the September consumer confidence (Tue.). Moreover, 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



< Back