Itaú BBA - Strong US activity data weigh on LatAm FX

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Strong US activity data weigh on LatAm FX

November 3, 2017

LatAm currencies weakened 1.12% as the USD strengthened on the back of strong hard data in leading indicators (ISM non-manufacturing and capital goods orders).

With information available until 6:30pm Brasilia time

Highlights

  • LatAm currencies weakened 1.12% as the USD strengthened (DXY: +0.21%) on the back of strong hard data in leading indicators (ISM non-manufacturing and capital goods orders). The BRL was the regional laggard (-1.44% to 3.3138/USD – weakest level since July) followed by the MXN (-1.02% to 19.1778/USD). Andean pairs also depreciated in the session (CLP: -0.73% to 634.51/USD; COP: -0.29% to 3,038/USD). 
  • As Brazilian markets reopened, the curve bear steepened (Jan19x25: +16bps) as the BRL sold off. In DI futures, the Jan-19 went up 3bps to 7.30% and the Jan-25 increased 19bps to 10.48%. Real rates also widened substantially as the Aug-22 closed at 4.75% (+12bps). 

Macro Backdrop

CHILE
  • The commercial activity index - which aggregates retail activity, wholesale and vehicle sales - grew a firm 3.8% year over year in the month of September (4.2% previously), with strong durable sales persisting. Higher vehicle sales explain the better outcome compared to our 3.2% forecast. This data, alongside the industrial production indicators, leads us to forecast the GDP proxy IMACEC to grow 1.5% year over year in September (2.4% in August). This would result in activity growth of 2.2% in 3Q17, progress from the 0.9% in 1Q17. 
  • An extended period of expansionary monetary policy, low inflation (favoring real wage growth) and improving sentiment all hint at a continuation of the private consumption recovery. Nevertheless, the fragile labor market – little to no job growth from the formal private sector – may curb the recovery. Overall, we expect GDP growth of 1.7% this year, from 1.6% last year, with a further pickup to 2.7% next year. In addition, the outcome of the general election and the debate over the reform agenda next year will likely have a significant influence on confidence and investment, and consequently on growth. Full Report
  • Business confidence is on the verge of reaching the neutral level, according to the October version of Icare’s index. The index has now completed 43 consecutive months in pessimistic territory, but posted the largest 12-month gain since dipping below the neutral level of 50 points in April 2014. The mining sub-index remains in optimistic territory (62.2) as copper prices stay elevated. Commercial confidence is also still in optimistic territory at 51.8 points (from 49.5 one year ago and 51.6 in the previous month). Meanwhile, industrial confidence increased 2.8 points over the twelve-month period to 46.8 points (44.3 in September) and construction confidence rose 17.6 points to 36.0 points. Our expectation of an activity recovery into 2018 (from GDP growth of 1.7% for this year to 2.7% next year), considers a confidence improvement that would lead to an enhanced investment performance. The improving confidence levels could be associated with higher copper prices, an improved outlook for the local and global economy and optimism regarding the impact of the political cycle. 

ARGENTINA

  • Analysts have pushed their inflation forecasts for 2017 and 2018 up a notch, according to the latest central bank survey of expectations. Participants now forecast higher monetary rates (7-day repo) by the end of both 2017 and 2018. Growth forecasts improved for both years. Analysts revised their 2018 inflation forecasts upward for the fifth consecutive month, this time to 16.0% (from 15.8% in the previous survey). For the next 12 months, the market expects 17.3% inflation (above the 16.9% posted in September). Both readings are above the upper bound of the target range for next year (10% ± 2%). 
  • Survey participants do not expect changes in the reference rate from its current level (27.75%) through December 2017. The central bank surprised the market with a 150-bp hike in late October, citing the sluggish pace of disinflation and the higher-than-expected increase in fuel prices. The latest survey shows that participants now expect a reference rate of 21% in 2018 (up from 19.5% in September). Finally, economists have raised their annual GDP growth forecasts to 2.9% for 2017 and 3.1% for 2018, from 2.8% and 3%, respectively. So activity is unlikely to help the central bank in its fight against inflation. Full Report

ALL LATAM

  • Itaú Inflationary Surprise Index – Chilean inflation surprises to the downside. Our Itaú Inflationary Surprise Index rose to -0.15 in October, coming from -0.22 in September. The Chilean component fell deeper into negative territory, driven by the lowest monthly inflation reading on record for September. Also, the Mexican sub-index turned negative for the first time since January; we expect the downward trend of inflation to accentuate ahead. In contrast, the Brazilian component kept rising for the fourth month in a row, indicating that inflation surprises are moderating. Full Report
  • Itaú Activity Surprise Index – Balanced surprises across LatAm. Our Itaú Activity Surprise Index fell to 0.01 in October, coming from 0.12 in September. The Brazilian surprise index declined again in October, as none of the tracked economic indicators registered positive surprises. In fact, both retail activity and industrial production missed analysts’ expectations, but the details herald stronger readings ahead. Similarly, all major activity releases surprised negatively in Colombia, but we believe in an activity recovery in 2H17, owing to lower interest rates, higher real wages and a favorable external environment. On the other hand, Mexican data came stronger than expected, showing activity was robust prior to the earthquakes.  

Full Report

Market Developments
  • GLOBAL MARKETS: The USD strengthened across the board (DXY: +0.21%) on the back of strong hard data in leading indicators (ISM non-manufacturing and capital goods orders). Also, the non-farm payroll rose 261k in October, below expectations (consensus: 313k), but was revised up by 90k in the prior two months. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities posted gains (CRB futures: +0.67%) lifted mostly by energy. Oil prices climbed (WTI: +2.03% to USD 55.88/bbl) after Baker Hughes reported that the number of oil and gas rigs in the US fell by 11 – the largest decline year-to-date. In agriculture, wheat outperformed (+1.85%); in metals, iron ore soared 2.05%. On a strong USD day, LatAm FX posted losses (-1.12%). The BRL was the regional laggard (-1.44% to 3.3138/USD – weakest level since July) followed by the MXN (-1.02% to 19.1778/USD). Andean pairs also depreciated in the session (CLP: -0.73% to 634.51/USD; COP: -0.29% to 3,038/USD). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Most LatAm credit spreads for the 5-year tenor widened. In Brazil, CDS increased 3bps to 173bps. Colombian and Mexican country risk went up to 117bps (+2bps) and 108bps (+1bp). Chilean spreads were stable at 51bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: As markets Brazilian markets reopened, the curve bear steepened (Jan19x25: +16bps) as the BRL sold off. In DI futures, the Jan-19 went up 3bps to 7.30% and the Jan-25 increased 19bps to 10.48%. Real rates also widened substantially as the Aug-22 closed at 4.75% (+12bps). Brazil Rates Tracker
  • LOCAL RATES – Mexico: Mexican yields traded range bound, in tandem with US Treasuries. In TIIE swaps, the 1-year inched down 1bp to 7.54% while the 5-year went 1bp upwards to 7.28%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, the front end of the curve went up 2-3bps. In Camara swaps, the 9-month increased 3bps to 2.41%. Chile Rates Tracker Conversely, short Colombian yields tightened as the COP posted solid gains (+0.90%). In IBR swaps, the 18-month fell 3bps to 4.65%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, October’s IPCA consumer inflation will be released (Fri.). We forecast a 0.50% monthly increase, with year-over-year inflation rising to 2.78% from 2.54%. The market will also remain focused on the political news flow. After the Lower House rejected the charges against President Temer, the government will likely try to resume discussions on the reform agenda, especially the social security reform. On economic activity, the key releases will be coincident indicators for October: Anfavea’s auto production (Tue.), traffic of heavy vehicles and paper cardboard dispatches (ABCR and ABPO, respectively).
  • In Mexico, the statistics institute (INEGI) will publish August’s gross fixed investment (Tue.). We estimate that gross fixed investment contracted 1% year-over-year. Moreover, INEGI will announce October’s CPI inflation (Thu.). We expect a 0.60% month-over-month variation, driven by the energy and regulated prices. Still, Banxico will hold its monetary policy meeting (Thu.). We expect the board to keep the reference rate at 7%. Finally, INEGI will publish September’s industrial production (Fri.). We estimate that industrial production fell by 2.2% year-over-year.
  • In Chile, the BCCh will publish the GDP proxy (Imacec) for the month of September (Mon.). We expect the GDP proxy IMACEC to grow 0.1% (SA) from August. Then, the BCCh will also publish the minutes of the October monetary policy meeting (Tue.). The minutes will probably show that the likelihood of further easing will hinge on incoming inflation prints. Moreover, the central bank will publish the trade balance for the month of October (Tue.). We expect a trade surplus of USD 450 million. Later, INE will publish nominal wage growth for September (Tue.). Finally, inflation for the month of October will be released (Wed.). We expect consumer prices to have gained 0.3% from September.
  • In Colombia, the National Institute of Statistics will release the October inflation print (Sat.). We expect consumer prices to gain 0.10% from September, so annual inflation would again rise due to a low comparison base. Furthermore, Banrep will publish the minutes of the surprise decision to cut the policy rate by 25-bp (to 5.0%) at the October monthly meeting (Fri.). We expect the minutes to show that further cuts will be data dependent.
  • In Argentina, the central bank will hold its biweekly monetary policy meeting, to decide on the reference rate (Tue.). In the last meeting, the central bank surprised the market by raising the monetary policy rate by 150bps, to 27.75%.

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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