Itaú BBA - The BRL and the MXN strengthen after the Fed

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The BRL and the MXN strengthen after the Fed

February 1, 2017

EM currencies posted gains, after the FOMC made only marginal adjustments to its near-term outlook.

With information available until 6:30pm Brasilia time

Highlights

  • EM currencies posted gains, after the FOMC made only marginal adjustments to its near-term outlook. The market’s focus now shifts to the important U.S. Payrolls report. We raised our forecast for the January non-farm payrolls to 205k (from 192k), due to the better-than-expected ADP employment change.
  • The BRL ranked the top regional performer. After testing the 3.16/USD handle early in the session, the Real rallied 0.66% after the FOMC, closing at 3.1281/USD. The oil rise supported the COP (0.62% to 2,905.33/USD) and the MXN (0.45% to 20.74/USD). The CLP stood flat (-0.02% to 647.40/USD) as Chilean markets closed prior to the Fed’s statement release.

Macro Backdrop

BRAZIL

  • Industrial production increased sharply by 2.3% m/m in December, once again below our expectations (3.2%) as well as the market’s (2.4%). Compared to December 2015, the indicator fell 0.1%. Sequentially, production increased in 3 out of 4 main economic categories: intermediary goods (1.4%), durable consumer goods (6.5%), semi-durable consumer goods (4.1%); production of capital goods fell 3.2%. Fundamentals continue to suggest growth ahead: inventories declined again in January and industrial demand posted another increase. Over the coming months, we expect the cyclical adjustment in inventories to continue as demand remains above production levels. Finally, monetary easing will fuel a gradual increase in industrial demand. Hence, we maintain our forecast of higher industrial production over the coming months. Full Report
  • Trade surplus in January came in stronger than the historical average. The trade surplus reached USD 2.7 billion in January, shy of our expectation and the consensus’ (both at USD 2.0 billion). Exports totaled USD 14.9 billion, rising 22.8% m/m, while imports added up to USD 12.1 billion (+4.7% m/m). Compared to January 2016, exports climbed 20.6%, while imports rose 7.6%. Over 12 months, the trade surplus advanced to USD 50 billion. The seasonally-adjusted quarterly moving average increased to USD 64 billion. The latest monthly result topped the January average of usually-weaker readings. Despite a stronger reading in January, we maintain our expectation of smaller trade surpluses in the next years than in 2016. A slightly stronger BRL (in real terms), the recovery in domestic demand and commodity prices below current levels could lead to weaker results, without compromising the country’s external sustainability. Full Report
  • According to Fenabrave, vehicle sales reached 147k in January (-4.4% m/m), weaker than expected. Sales remained in low levels. Our forecast for January auto production (Anfavea) is 182k, regarding the actual data to be released Monday (February 6). If confirmed, production will decrease 8.9% m/m.
  • Our proprietary Market Conditions Index improved strongly in January. The IU-MCI index showed market conditions improved sharply in January, led by both Brazilian financial variables and commodity prices. The Itaú Unibanco Market Conditions Index went to 0.63 in January from -0.02 in December. Nonetheless, the three-month moving average was flat around 0.58.
    Full Report
  • What if the inflation target is reduced? Our Macro team published a study highlighting that a reduction in the inflation target does not necessarily limit the monetary-easing cycle in the short run. Making the assumption that monetary policy is perfectly credible, a reduction in the inflation target, enables lower inflation and lower nominal interest rates. Full Report

MEXICO

  • Banxico’s January Economist Survey showed the market now estimates higher inflation, lower GDP growth, and a weaker exchange rate. Inflation expectations for 2017 rose above the target range (2%-4%), to 5.3% in January from 4.1% in the December survey, probably reflecting the increase of gasoline prices since the liberalization. For next year, inflation forecasts rose to 3.9% (from 3.6%), while long-term expectations were more stable, but still showed an increase (the average inflation expected for the next 5 to 8 years increased 10bps to 3.5%). On the activity front, GDP growth estimates for 2017 and 2018 were marked down to 1.5% (from 1.6%) and 2.2% (from 2.3%), respectively. In a nutshell, expectations seem fragile and highly contingent on the evolution of U.S. policies. For next surveys, we believe the bias will continue to be towards higher inflation and weaker economic activity.

CHILE

  • Polls show a tight race in Chile. According to Adilmark’s January public opinion survey, Guillier rose by 2% from December to 28%, beyond the 5% recorded five months prior. This is the first time that former President Sebastián Piñera has not topped Adilmark’s poll in the current electoral cycle. Since August, we have seen a notable drop in undecided voters to 25% from 47%, reducing the potential element of surprise. Yet, this group of voters will still remain a key player in the outcome of the presidential race.

Market Developments

  • GLOBAL MARKETS: EM currencies posted gains, after the FOMC made only marginal adjustments to its near-term outlook. The market’s focus now shifts to the important payrolls report. We raised our forecast for the January U.S. non-farm payrolls to 205k (from 192k), due to the better-than-expected ADP employment change. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Oil rose on signs that Russia cut its production in January. Brent gained 1.58% to USD 56.46/bbl. Accordingly the COP appreciated 0.62% to 2,905.33/USD and the MXN strengthened 0.45% to 20.74/USD. The BRL ranked the top regional performer; after testing the 3.16/USD handle early in the session, the Real rallied 0.66% after the FOMC, closing at 3.1281/USD. The CLP stood flat (-0.02% to 647.40/USD) as Chilean markets closed prior to the Fed’s statement release.
    FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: credit spreads receded all across LatAm. For the 5-year tenor, Brazil traded at 248bps (-2bps), Colombia at 152bps (-2bps), Chile fell 3bps to 80bps. Mexican CDS inched down 1bp to 166bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Nominals tightened across the curve, echoing the BRL’s solid performance. In DI futures, the Jan-19 narrowed 2bps to 10.35%. Short linkers (NTN-Bs) narrowed 1-3bps up to the 2026s, whereas the long end edged higher (2050: +2bps to 5.60%). Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican yields widened in tandem with U.S. Treasuries. In TIIE swaps, the 1-year increased 3bps to 7.11% and the 10-year rose 5bps to 7.56%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: Chilean rates accompanied the widening of DM yields, edging up 1-2bps past the 2-year. Chile Rates Tracker In Colombia, IBR swaps traded range bound; the 2-year stood flat at 5.88%. Colombia Rates Tracker

Upcoming Events 

  • In Mexico, gross fixed investment will be released (Fri.). We expect it to print 0.3% y/y.
  • In Chile, BCCh's minutes are on the market's radar. BCCh will publish the minutes from the January monetary policy meeting (Fri.). With the market now pricing in more rate cuts than the 50-bp cycle outlined in the 4Q16 Inflation Report, the minutes could provide some indication on the magnitude of the easing cycle.
  • In Colombia, the Inflation Report and export data are on the radar. DANE will publish export data for December (Thu.). We expect to see exports of USD 3.1 billion on the back of higher oil prices. Also important, Banrep will publish the 4Q16 Inflation Report (Fri.).

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa



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