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Risk aversion spike batters LatAm FX

August 10, 2017

Global stocks still under pressure on heightened tensions in the Pacific region.

With information available until 6:30pm Brasilia time

Highlights

  • Global stocks still under pressure on heightened tensions in the Pacific region. Equity markets were strong on the red and the VIX climbed to 16.04 – a level last seen since mid-November. LatAm FX (-0.35%) also extended losses. Once again, the BRL (-0.64% to 3.1760/USD) was the laggard within high-beta currencies, further affected by the soybean rout (-3.35%). By the time of writing, the MXN is trading 0.15% weaker to 17.9734/USD. Andean pairs saw little action in the session (COP: +0.18% to 2,997/USD; CLP: -0.01% to 648.19/USD). 
  • Mexican rates narrowed after Banxico’s monetary policy meeting. In the statement, the board reinforced its previous guidance and also hinted at a somewhat more benign inflation assessment (see Macro Backdrop). In TIIE swaps, the 1-year went down 5bps to 7.30% and the 5-year decreased 6bps to 6.89%.

Macro Backdrop

BRAZIL
  • Traffic of heavy vehicles rose 1.7% mom/sa in July (our seasonal adjustment). The index shows a clear upward trend since 2H16 and is consistent with our scenario of gradual recovery in economic activity. We revised upwards our forecast for July industrial production by 0.1 p.p. to 0.4% mom/sa. 
MEXICO
  • After hiking rates for seven consecutive meetings (and 400bps since December 2015), Banxico stuck to the guidance provided in the last meeting - which signaled the end of the tightening cycle - by deciding to leave the reference rate unchanged at 7%. The Board reaffirmed that the current level of the reference rate is consistent with the convergence of inflation to the 3% target. Nevertheless, just like in June, it qualified this assertion by arguing that, given various risks, the Board “will be vigilant to ensure a prudent monetary policy”, suggesting there is no room for rate cuts and rate hikes remain a possibility should inflation deviate significantly from the path forecasted by the monetary authority. Notably, the board downplayed the further increase of annual inflation (to 6.44% in July, from 6.31% in June) by stating that the recent pressure has been attributable to one-off increases in agricultural prices. In fact, the statement mentions that, excluding the spike of tomato prices, annual inflation would have fallen to 6.17% in July. 
  • Our base-case scenario is that Banxico will take a cautious approach in light of the Fed rate hikes and the uncertainty surrounding the presidential election next year, maintaining the reference rate at 7% until 2H18. Rate cuts to support the economy are unlikely to be implemented anytime soon. Importantly, the statement continues mentioning the relative monetary policy stance between Mexico and the US as an important variable to monitor, so rate hikes in the US (which we expect to continue throughout 2018) reduce the odds of rate cuts in Mexico. Also, the heating-up of political campaigning by the end of the year, with the presidential elections coming closer (July 2018), will pose risks on the MXN (and inflation), and many board members already hinted that this limits the room for monetary policy action. Finally, we highlight that the authorities do not see the current level of policy rate as excessively tight (or tight at all) and the economy will likely perform well in 2018, supported by robust US growth coupled with lower protectionism risk, so there would be no urgency for reducing interest rates. Full Report

ARGENTINA

  • National inflation accelerated in July, but less than expected. Consumer prices gained 1.7% between June and July, up from 1.2% in the previous month but below the 2.1% increase pointed by private surveys. Year-to-date, prices increased 13.8%. In the so-called greater Buenos Aires area prices rose 1.7% mom in July (1.4% in June) bringing annual inflation to 21.5%, slightly lower than in June (21.9%). At the national level core inflation reached 1.8%, similar to that in the greater Buenos Aires area.
  • Scheduled adjustments in regulated prices in November and the recent ARS depreciation pose challenges for inflation ahead. We see inflation at 22% by the end of this year, far above the 17% upper bound of this year’s target. In this context, the central bank will likely stay put in the upcoming monetary policy decisions and rate cuts are likely only once (and if) the political uncertainty diminishes. Full Report
Market Developments 
  • GLOBAL MARKETS: Global stocks still under pressure on heightened tensions in the Pacific region. Equity markets were strong on the red and the VIX climbed to 16.04 – a level last seen since mid-November. Additionally, haven assets extended gains: JPY (+0.79%) and gold (+0.72%). Global Markets Tracker
  • CURRENCIES & COMMODITIES: In commodities, oil declined (WTI: -2.13% to USD 48.66/bbl) after Opec’s monthly report. In the statement, they said its output rose for the third sequential month in July, even though its global demand forecasts increased for 2017 and 2018. In agriculture, corn (-4.03%), soybean (-3.31%) and wheat (-4.13%) posted losses after the monthly Wasde report showed US supplies of all three crops above market expectations. LatAm FX (-0.35%) was further pressured by the risk-off tone in global markets. By the time of writing, the MXN is trading 0.15% weaker to 17.9734/USD. Once again, the BRL was the laggard within high-beta currencies, closing at 3.1760/USD (-0.64%). Andean pairs were broadly stable in the session (COP: +0.18% to 2,997/USD; CLP: -0.01% to 648.19/USD). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Credit spreads widened all across LatAm once again. CDS in Mexico and Colombia increased 3bps to 105bps and 129bps. Country risk in Chile inched up 1bp to 64bps. Finally, Brazilian spreads widened the most to 206bps (+6bps). External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve bear steepened on market concerns over negative fiscal headlines. The LTN (Apr-18, Oct-19 and Jul-21) auction also pressured rates. In DI futures, the Jan-19 inched up 1bp to 8.08% and the Jan-21 widened 8bps to 9.41%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican rates narrowed after Banxico’s monetary policy meeting. In the statement, the board reinforced its previous guidance and also hinted at a somewhat more benign inflation assessment (see Macro Backdrop). In TIIE swaps, the 1-year went down 5bps to 7.30% and the 5-year decreased 6bps to 6.89%. For 2018, the curve implies roughly 60bps in rate cuts. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, yields were mixed in the session. In Camara swaps, the 1-year went down 2bps to 2.39% whereas the 10-year increased 1bp to 4.12%. Chile Rates Tracker In Colombia, yields traded range bound. In IBR swaps, most rates were stable (1-year at 4.99%), while the 10-year inched up 1bp to 6.33%. Colombia Rates Tracker

Friday Events

  • In Mexico, the statistics institute (INEGI) will publish June’s industrial production. We expect a 0% year-over-year expansion (down from 1% in May), based on coincident indicators – such as vehicle production, oil output, and public investment – which weakened in June. 
  • In Colombia, Banrep will release the minutes of the July monetary policy meeting. 

Latam Macro Calendar

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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