Itaú BBA - The BRL outperforms as political risks recede at the margin

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The BRL outperforms as political risks recede at the margin

April 4, 2017

The BRL (+0.68% to 3.0935/USD) topped its LatAm peers as the market reduced the risk of discontinuity in the fiscal reform effort.

With information available until 6:30pm Brasilia time

Highlights

  • In LatAm FX, currencies under our coverage were mixed. The BRL (+0.68% to 3.0935/USD) outperformed its LatAm peers as the market reduced the risk of discontinuity in the fiscal reform effort. The CLP posted losses of 0.29% to 660.47/USD and the MXN was the regional laggard, trading at 18.83/USD (-0.82%). The COP slightly strengthened to 2,865.58/USD (+0.13%). 
  • In Chile, while Camara swaps short rates (until 18-month) traded range bound, with an upward bias (1-year: +2bps to 2.73%), long term rates fell substantially (5-year: -6bps to 3.48%; 10-year: -5bps to 4.06%). Additionally, the curve implies 80bps in rate cuts for this year. For the time being, we see the policy rate at 2.5% by YE17 (ie. further 50bps of easing), however, the cautious tone adopted by the BCCh board puts an upward bias to this projection. 

Macro Backdrop

BRAZIL
  • Industrial production rose 0.1% in February, below the median of market expectations (0.7%) and close to our call (0.2%). Compared to February 2016, the indicator fell 0.8%. Breaking down by activity, manufacturing climbed 0.4%, while extraction and mining (more affected in the short run by exogenous factors) contracted 0.5% m/m. On a more detailed breakdown, 13 out of 24 activities posted monthly gains, with machinery and automobiles standing out. The breakdown by economic category shows substantial expansion in the production of durable consumer goods (7.1%) and capital goods (6.5%), a slight gain in intermediate goods (0.5%), and a decline in semi durable and non-durable consumer goods (-1.6%). The weighted sum of seasonally-adjusted advances outlines expansion, unlike the aggregate result. Available coincident indicators (capacity utilization, vehicle sales, weekly foreign trade figures, power consumption) point to a slight decline in industrial production in March. Our preliminary forecast is -0.4% m/m, consistent with a quarterly change of +1.5% in 1Q17 (thanks to a strong gain in December 2016), reinforcing our outlook for economic growth in the quarter. Full Report
  • Market Conditions Index: less expansionary given the drop in commodities. Brazilian market conditions worsened in March. The Itaú Unibanco Market Conditions Index (IU-MCI) fell to -0.08 from 0.69. The decline owes to a drop in commodity prices. The three-month moving average was stable at around 0.58, highlighting the fact that, despite the month’s deterioration, market conditions remain expansionary. Full Report
ALL LATAM
  • Mostly downside inflation surprises. Our Itaú Inflationary Surprise Index reached -0.16 in March, coming from -0.22 in February. The driver behind this modest acceleration was Mexico, where all inflation indicators released came in above expectations. Nevertheless, inflation data from the remaining South American countries asserted the ongoing disinflationary context, as activity in the region points to a slow and unsteady recovery. Full Report

Market Developments 

  • GLOBAL MARKETS: Risk on day as equity markets were on the green and US Treasuries widened ahead of the week releases (Fed Minutes and US employment data). For the 5-year, yields went up 3bps to 1.88% and for the 10-year they also increased 3bps  to 2.35%. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities traded higher as oil prices increase (Brent: +2.15% to USD 54.26/bbl) and iron ore posted gains (+1.59%). In LatAm FX, currencies under our coverage were mixed. The CLP posted losses of 0.29% to 660.47/USD and the MXN was the regional laggard, trading at 18.83/USD (-0.82%). The COP slightly strengthened to 2,865.58/USD (+0.13%). The BRL (+0.68% to 3.0935/USD) outperformed its LatAm peers as the market reduced the risk of discontinuity in the fiscal reform effort. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm Credit spreads for the 5-year tenor traded range bound in the session. Both Mexican and Chilean country risk inched up 1bp, to 131bps and 73bps, respectively. Colombian spreads stood flat at 134bps. On the other hand, CDS in Brazil fell 2bps to 223bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Brazilian yields traded lower in the session. In DI Futures, the Jan-19 fell 4bps to 9.44% and the Jan-25 decreased 6bps to 10.09%. Accordingly, breakevens tightened as the 5-year fell 7bps to 4.40%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: The Mexican curve slightly bear steepened in the session, again. In TIIE swaps, the 9-month increased 1bps to 7.12% and the 10-year increased 3bps to 7.51%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, long rates narrow in the session. In Camara swaps, while short rates (until 18-month) traded range bound with an upward bias (1-year: +2bps to 2.73%), long term rates fell substantially (5-year: -6bps to 3.48%; 10-year: -5bps to 4.06%). Additionally, the curve implies 80bps in rate cuts for this year. For the time being, we see the policy rate at 2.5% by YE17 (ie. further 50bps of easing), however, the cautious tone adopted by the BCCh board puts an upward bias to this projection. Chile Rates Tracker In Colombia, short rates fell. In IBR swaps, while short yields decreased (6-month: -4bps to 6.04%), long yields (past 1-year) traded range bound (5-year: flat at 5.50%). Colombia Rates Tracker

Upcoming Events

  • In Brazil, Anfavea will release data from the automobile sector in March (Thu.), providing relevant coincident indicators for both industrial production and broad retail sales. Then, March’s IPCA consumer inflation will be released (Fri.). We forecast a 0.27% monthly rise, with year-over-year inflation falling to 4.6% (February: 4.8%).
  • In Mexico, the statistics institute (INEGI) will publish January’s gross fixed investment (Wed.). We forecast that gross fixed investment grew 0.3% y/y (December: +0.9%). Finally, INEGI will announce March’s CPI inflation (Fri.). We expect a 0.44% m/m variation, driven by an increase of core goods (tradable) prices - which are pressured by the lagged effects of exchange rate depreciation - and a rebound of agricultural prices. 
  • In Chile, the central bank will publish the GDP proxy (Imacec) for the month of February (Wed.). We expect the GDP proxy to contract 0.7% from January (previous: +0.4%), resulting in an annual growth rate of -1.7% (previous: +1.4%) as activity in the quarter continues to disappoint. The National Institute of Statistics (INE) will publish nominal wage growth for February (Thu.). In the previous month, nominal wage growth moderated to 4.4% y/y (previous: 4.7%), as low inflation and the loosening labor market ease wage pressure. Still, INE will publish inflation data for March (Fri.). We expect prices to gain 0.5% from February (previous: +0.2%). Consumer prices are expected to be pulled up by seasonal increases to lemon and tomato prices. As a result, annual inflation would remain at 2.8%, hovering below the center of the central bank’s 2%-4% tolerance range. Finally, the central bank will publish the trade balance for March (Fri.). We forecast a USD 50 million surplus (previous: USD 236 million surplus), taking the rolling 12-month trade balance to USD 4.1 billion (2016: USD 5.3 billion). 
  • In Colombia, inflation for March will be released (Wed.). We expect consumer prices to gain 0.44% from February with food price gains continuing to moderate. As a result, annual inflation will decline to 4.66%. Then, the monetary policy meeting minutes from March will be published (Fri.). At the meeting, the central bank cut the policy rate by 25-bp to 7.0%. The decision was by a three-way split. The minutes will likely confirm that the policy rate will keep falling at a steady pace in the months ahead, with the timing of each cut being data dependent.

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa



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