Itaú BBA - The BRL outperforms on strong Chinese data and the BCB intervention

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The BRL outperforms on strong Chinese data and the BCB intervention

April 17, 2017

Yet, the BRL was also boosted by signs that the highly awaited presentation, by Social Security reform rapporteur Maia, will come through on Tuesday (April 18).

With information available until 6:30pm Brasilia time

Highlights

  • In LatAm FX, all currencies under our coverage appreciated. On the back of stronger-than-expected Chinese data, the CLP posted gains of 0.63% to 645.64/USD and the BRL outperformed the majors, closing at 3.1001/USD (+1.42%). Yet, the BRL was also boosted by the BCB intervention and by signs that the highly awaited presentation, by Social Security reform rapporteur Maia, will come through on Tuesday (April 18). The COP went to 2,853.18/USD (+0.47%) and the MXN was broadly stable trading at 18.50/USD (+0.13%).
  • Ahead of the Copom minutes, Brazilian rates traded lower as, according to Focus survey, inflation expectations continue to decline. In DI Futures, the Jan-18 fell 2bps to 9.64% and the Jan-21 went 3bps down to 9.92%. Andean markets had poor liquidity coming back from the Easter holiday. In Chile, the curve bull steepened. In Camara swaps, the 6-month fell 11bps to 2.58% while the 5-year decreased 4bps to 3.30%.

Macro Backdrop

BRAZIL
  • Inflation expectations continue drifting below target. According to BCB’s Focus survey, median inflation expectations for 2017 declined to 4.06% (-3bps), and 2018 expectations fell to 4.39% (-7bps). Year-end Selic expectations stood flat at 8.50% for YE17, YE18 and YE19. The market sees a slightly more depreciated BRL, at 3.40/USD by YE18 (from: 3.37/USD), and at 3.48/USD by YE19 (from: 3.47/USD). 2017 GDP growth expectations inched down to 0.40% (from: 0.41%). BCB Report
  • According to Central Bank, the IBC-Br activity index rose 1.31% m/m in February, well above our forecast (0.3%) and market expectations (0.5%). Relative to the same month in 2016, IBC-BR contracted 0.7% y/y. Besides the stronger February result, the January result was heavily revised upward, following IBGE’s adjustment of retail sales and services real revenue. January seasonally adjusted growth was revised to 0.6% m/m, from -0.3% m/m in the first release. Therefore, the carry-over into the 1Q17 reached 1.5% q/q reinforcing the upward bias to our current GDP 1Q17 forecast (at 0.5% q/q).
  • 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 18.
COLOMBIA
  • Growth of oil refining limited the overall industrial production decline. Industrial production contracted 3.2% y/y (previous: -0.3%), well below market consensus (-1.2%) and our expectation (-2.0%). Even after controlling for seasonal and calendar effects, industrial production contracted 2.6% from last year. The 13.0% drop in beverage processing was once again the main drag in the month (-1.4 p.p.), hampered by a high base of comparison due to hot weather last year during the peak of the El Niño phenomenon. The weakness is widespread with around 70% of the categories shrinking from last year. Meanwhile, oil refining continues to grow – albeit at single digit rates vs. 23% in 2016 – and is still the principal driver of activity. Once excluded, industrial production contracted by an even greater 5.7%. In the quarter, industrial production fell 0.2% y/y (4Q16: +1.6%), the first decline since the quarter ending in May 2015. At the margin, industrial production contracted 3.9% q/q (4Q16: +3.9%).
  • Meanwhile, private consumption is weak across the board. The loosening labor market and depressed confidence do not hint at a swift recovery ahead. Retail sales declined 7.2% y/y, a slowdown from the 2.2% drop in January and the largest annual fall in the new series (2013 onwards), and likely since international financial crisis. The weak print surprised the -1.6% market consensus as well as our -1.5% forecast. The implementation of the increased sales tax could explain weaker activity. Durable goods sales (vehicles and parts as well as appliances and furniture), which had been the driving force behind activity in recent months, subtracted 2.5 p.p. from the overall retail sales growth rate (December: +5.2 p.p.; January: -0.3 p.p.). Approximately 85% of the divisions registered contractions, much like the previous month. In the quarter ending in February, retail sales fell 0.3%, down from the +3.7% in 4Q16. Adjusting for seasonal and calendar effects, retail sales excluding fuel sales, fell 2.7% y/y in February. Moreover, at the margin, this indicator decelerated to -4.4% q/q (4Q16: +21.6% q/q). Our recovery outlook for Colombia – growth picking up to 2.3% in 2017 from 2.0% last year – includes downside risks. Declining inflation and higher average oil prices will aid the recovery, however, a loosening labor market and political concerns will likely counter these gains. 
  • All in all, we see the Banrep advancing the loosening cycle began last December. The data, alongside falling inflation and declining inflation expectations, leads us to believe a rate cut at this month’s meeting is very likely. While central bank General Manager Echavarría recently noted that the data at the time did not warrant the use of deeper cuts, we cannot rule out a move to a more aggressive strategy in coming meetings amid a disappointing evolution of internal demand. Full Report

Market Developments 

  • GLOBAL MARKETS: China’s 1Q GDP and March economic activity came above expectations, signaling a strong growth at the beginning of 2017. GDP real growth rose 0.1 p.p. to 6.9% y/y (consensus: 6.8%), while nominal growth accelerated to 11.8% y/y (previous: 9.6%). Also, industrial production increased 1.3 p.p. to 7.6% y/y, above our call (6.2%) and market consensus (6.3%), fixed investment came at 9.2 % y/y YTD (our call and consensus: 8.8%) and retail sales accelerated to 10.9% y/y from 9.5% (consensus: 9.7%). Hence, commodity-linked currencies outperformed (+0.68) EM FX (+0.27%) on average terms. Global Markets Tracker
  • CURRENCIES & COMMODITIES: While oil prices fell (WTI: -0.81% to USD 52.75/bbl), copper posted gains of 0.95%. In LatAm FX, all currencies under our coverage appreciated. The COP went to 2,853.18/USD (+0.47%) and the MXN was broadly stable trading at 18.50/USD (+0.13%). On the back of stronger-than-expected Chinese data, the CLP posted gains of 0.63% to 645.64/USD and the BRL outperformed the majors, closing at 3.1001/USD (+1.42%). Yet, the BRL was also boosted by the BCB intervention and by signs that the highly awaited presentation, by Social Security reform rapporteur Maia, will come through on Tuesday (April 18). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm Credit spreads for the 5-year tenor traded range bound. CDS in Chile, Mexico and Colombia inched up 1bp to 77bps, 130bps and 135bps, respectively. In Brazil, however, spreads decreased to 225bps (-1bp). External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Ahead of the Copom minutes, Brazilian rates traded lower as, according to Focus survey, inflation expectations continue to decline. In DI Futures, the Jan-18 fell 2bps to 9.64% and the Jan-21 went 3bps down to 9.92%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Yields traded substantially lower in the session. In TIIE swaps, the 1-year fell 5bps to 7.12% and the 5-year decreased 7bps to 7.17%. Accordingly, breakevens tightened as the 5-year went down 6bps to 3.65%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: Andean markets had poor liquidity coming back from the Easter holiday. In Chile, the curve bull steepened. In Camara swaps, the 6-month fell 11bps to 2.58% while the 5-year decreased 4bps to 3.30%. Chile Rates Tracker In Colombia, most rates traded lower as well. In IBR Swaps, the 1-year inched down 1bp to 5.73% while the 5-year decreased 5bps to 5.49%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, the Social Security reform’s rapporteur, Rep. Arthur Maia (PPS Party), is expected to conclude revisions to the original proposal and issue his report in the Lower House Special Committee (Tue.). See our Macro Vision report on the fiscal impact of alternative transition rules. Then, the BCB’s Copom minutes will be released (Tue.). In its last meeting, the committee delivered the widely expected outcome, a 100-bp rate cut taking the Selic rate to 11.25% p.a. Moreover, the IPCA-15 consumer inflation preview for April will be released (Thu.). We forecast a 0.28% monthly rise, with year-over-year inflation decelerating to 4.5% from 4.7%. On economic activity, CAGED formal job creation for March may come through. We expect net creation of 19k jobs, the second positive reading in a row. Yet in seasonally adjusted terms, this represents net closing of 18k jobs. Our forecast may be adjusted following Industry Employment Data for the State of São Paulo (FIESP) (Wed.). Our CAGED estimate is consistent with a 4.9% y/y decline in FIESP employment. Finally, industrial business confidence (CNI) for April will be released (Wed.), for which we expect the current upward trend to continue ahead. 
  • In Mexico, INEGI will announce March’s unemployment rate (Fri.). We expect the unemployment rate to post 3.2% (March 2016: 3.7%) given that labor market conditions remain tight. 
  • In Colombia, think-tank Fedesarrollo will release the March consumer confidence (Wed.). The index, which has completed 14 consecutive months in pessimistic territory, has declined on the back of the terms-of-trade shock as well as tightening monetary and fiscal policies. Moreover, the trade balance for the month of February will be published (Thu.). We expect a trade deficit of USD 824 million, smaller than the USD 1.0 billion deficit recorded one year ago. Finally, the February activity coincident indicator (ISE) will be published (Fri.). Recent indicators reaffirmed that the economy started the year on a weak footing. In the previous month, ISE grew a mild 1.2% y/y.

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa




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