Itaú BBA - Relief rally for the BRL after France first round election

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Relief rally for the BRL after France first round election

April 24, 2017

The BRL outperformed its LatAm peers, closing at 3.1279/USD (+0.62%), as France heads towards a Macron-Le Pen run-off.

With information available until 6:30pm Brasilia time

Highlights

  • Risk on day with decreased volatility gauges and European equity markets strong on the green amid the French election first round results. As we expected, France is heading to a Macron-Le Pen run-off. Hence, most currencies under our coverage appreciated. The BRL outperformed its LatAm peers, closing at 3.1279/USD (+0.62%). The MXN is trading at 18.73/USD (+0.43%) and the COP posted gains of 0.17% to 2,873.45/USD. Bucking the regional trend, the CLP depreciated 0.42% to 655.20/USD. 
  • LatAm Credit spreads for the 5-year tenor decreased across the board on the external tailwinds. CDS in Chile and Colombia fell 4bps to 74bps and 130bps, respectively. Mexican spreads narrowed 5bps to 125bps. In Brazil, country risk posted stronger gains, to 218bps (-6bps) – close to 1-month low.

Macro Backdrop

BRAZIL
  • Macro Vision: we increased our 1Q17 GDP forecast to 1.4% from 0.5%. Our scenario assumes a strong contribution from agriculture, a favorable carryover for industrial production and stabilization in service activity. Given that the advance is driven by specific factors concentrated in 1Q17, our 2017 forecast of 1.0% is maintained for now. The pace and consistency of the rebound depend on the progress of reforms led by the government. Full Report
  • Professional forecasters revised 2017 GDP to the upside. According to BCB’s Focus survey, 2017 GDP growth expectations increased to 0.43% (from: 0.40%). Median inflation expectations for 2017 declined to 4.04% (-2bps), and 2018 expectations fell to 4.32% (-7bps). Expectations for 2019 and 2020 stood at 4.25%, whereas median forecast for 2021 fell to 4.00%. Year-end Selic expectations stood flat at 8.50% for 2017, 2018 and 2019. The market sees a slightly more appreciated BRL, at 3.38/USD by YE18 (from: 3.40/USD). BCB Report
  • April’s industrial business confidence preview (FGV) points to a 0.1 p.p. increase. The data showed a 0.3 p.p. fall in the current situation component and a 0.5 p.p. increase in the expectations component.  Also, industrial capacity utilization indicates stability in the month, still well below the historical average and without tracking the confidence improvement registered since 2016. The definitive numbers will be published Friday (April 28).
  • Orange Book: more consistent signs of rebound. This report summarizes anecdotal information on current economic conditions received from key business contacts, economists, market experts, and other sources outside Itaú. Falling interest rates, the end of the cycle of falling inventories, record-high agricultural harvest, higher international commodity prices and a recovery in consumer purchasing power (thanks to lower inflation) are consistent with a recovery in the Brazilian economy. On the other hand, deleveraging by companies and consumers and lingering uncertainties regarding fiscal reforms are limiting growth. Full Report
  • BCB placed the full offering of 16,000 FX swaps. After closing, the Central Bank called a roll over auction of up to 16,000 contracts on April 25. 
MEXICO
  • Mexico’s CPI fell between second half of March and in the first half of April, due to seasonal factors. The CPI posted a -0.15% bi-weekly variation - close to market expectations (-0.19%) - explained by the seasonal fall of electricity prices (-13.4%) which subtracted 34bps from the inflation print. Overall, CPI inflation in the first half of April was close to its 5-year median (but significantly above the print recorded in 2016). Annual headline inflation increased to 5.62% y/y (previous: 5.42%) further above the Central Bank’s target. 
  • We expect inflation to peak in 3Q17 and then decrease to 5% by the end of 2017, driven by the MXN’s appreciation observed during this year and the weakening of domestic demand. The Peso has appreciated almost 10% year-to-date, supported by the perception of lower protectionism risk. So this could help to contain the pressure on tradable prices and reduce inflation expectations. The slowdown of the economy (in part induced by tighter macro policies) will also contribute to bring inflation down. Full Report
Market Developments 
  • GLOBAL MARKETS: Risk on day with decreased volatility gauges and European equity markets were strong on the green (Euro Stoxx: +3.99%) amid the French first round election results. As we expected, France is heading to a Macron-Le Pen run-off. Available poll data shows the centrist candidate margin over Le Pen remains higher than 20%. Accordingly, the EUR posted substantial gains (+1.29%) and DM yields widened, mostly due to EONIA (10-year: +5bps). Global Markets Tracker
  • CURRENCIES & COMMODITIES: Oil prices fell (WTI: -0.91% to USD 49.17/bbl) and soybeans posted gains of 1.14%. Despite lower commodities, commodity-linked currencies posted gains (Commodity FX: +0.84%) and EM FX rose 0.64% on average. Hence, most currencies under our coverage appreciated. The MXN is trading at 18.73/USD (+0.43%) and the COP posted gains of 0.17% to 2,873.45/USD. The BRL outperformed its LatAm peers, closing at 3.1279/USD (+0.62%). On the other hand, the CLP was the regional laggard, depreciating 0.42% to 655.20/USD. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm Credit spreads for the 5-year tenor decreased across the board. CDS in Chile and Colombia fell 4bps to 74bps and 130bps, respectively. Mexican spreads narrowed 5bps to 125bps. In Brazil, country risk posted stronger gains, to 218bps (-6bps). External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Long Brazilian yields narrowed on the external tailwinds and as markets revised down longer term inflation expectations (see Macro Backdrop). In DI futures, the Jan-18 fell 4bps to 9.50% and the Jan-25 decreased 5bps to 10.30%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican yields traded range bound in the session. In TIIE swaps, the 1-year inched up 1bp to 7.22% and the 5-year stood flat at 7.26%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, long rates widened. In Camara swaps, the 1-year inched up 1bp to 2.50% and the 5-year increased 4bps to 3.38%. Chile Rates Tracker In Colombia, yields were mixed. In IBR Swaps, the 1-year widened 3bps to 5.50% while the 10-year narrowed 3bps to 5.93%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, FGV’s final industrial business confidence reading will be released (Fri.). Then, the nationwide unemployment rate will also hit the wires (Fri.). We expect the rate to reach 13.5% in the quarter ended in March, standing still at 13.1% in seasonally adjusted terms. On fiscal accounts, March’s tax collection will be released throughout the week. We forecast BRL 99.5 billion in tax collections. Moreover, the consolidated primary budget balance for March will come through (Fri.). We expect a BRL 11.8 billion deficit, with the central government result (due Thur.) posting a BRL 8.6  billion deficit and regional governments and state-owned companies’ result amounting to a BRL 1.0 billion deficit (they don’t add up due to a discrepancy between the Treasury’s and the Central Bank’s expenditure accounting). Onto the balance of payments report (Tue.), we expect a current account surplus of USD 50 million in March, topping last year’s deficit of USD 863 million for the same month. Over twelve months, the current account deficit should sum to USD 21.9 billion (-1.2% of GDP). We expect direct investment in the country (DIC) to register inflows of USD 7.0 billion in March - if confirmed, DIC will amount to USD 86 billion over 12 months. Finally, the Lower House may also vote the labor reform during the week. 
  • In Mexico, the statistics institute (INEGI) will announce the growth rate of February´s retail sales (Wed.). In January, retail sales fell 1.1% from December, posting two consecutive declines, bringing quarter-over-quarter annualized growth down to 2.2% (December: 7.0% q/q). Moreover, INEGI will publish trade balance for March (Thu.). We expect the trade deficit to continue narrowing on the back of higher U.S. growth, a competitive real exchange rate and a deceleration of internal demand. Still, INEGI will release the GDP figures for 1Q17 (Fri.). We have recently revised our GDP growth forecast for 2017 to 1.8% (from: 1.6%). Still, higher inflation, tighter macro policies and remaining uncertainties over trade relations with the U.S. are consistent with a slowdown from 2016. Finally, the Ministry of Finance will announce the fiscal balance for March (Fri.). We expect that a whopping dividend from the central bank will likely allow the government to surpass the fiscal targets set for 2017, reducing the odds of a sovereign rating downgrade.
  • In Chile, INE will publish the national unemployment rate for 1Q17 (Fri.). We expect to see some further evidence of labor market loosening with an increase in the unemployment rate to 6.6%, from 6.3% in the equivalent period last year, and decelerating job creation. Recent data has shown that employment growth is exclusively sustained by low quality jobs as salaried jobs are being shed, a reflection of an even weaker labor market. Then, the national statistics agency (INE) will publish the industrial activity indicators for the month of March (Fri.). We expect manufacturing production to contract 1.5% from last year (February: -1.0%), negatively affected by metal related manufacturing.
  • In Colombia, the highlight of the week in Colombia will be central bank’s monthly monetary policy meeting (Fri.). We expect another 25-bp rate cut this month, taking the policy rate to 6.75%, as the central bank remains cautious. Looking ahead, we cannot rule out the possibility of more aggressive moves. Then, Fedesarrollo will publish the March retail and industrial confidence levels (Thu.). With the economy continuing to show signs of weakness, we expect confidence levels to remain at low levels. Moreover, the national unemployment rate for the month of March will be released (Fri.). We expect the labor market to remain weak ahead amid low dynamism of the Colombian economy. 

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa



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