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The BRL weakens on lower commodity prices

March 21, 2017

Metals sold off as iron ore prices fell 3.20% and copper decreased 2.08%.

With information available until 6:30pm Brasilia time

Highlights

  • Metals sold off as iron ore prices fell 3.20% and copper decreased 2.08%. Authorities in Beijing and four provincial Chinese capitals have introduced further property tightening measures including lending curbs and purchase restrictions. Accordingly, most currencies under our coverage depreciated. The COP posted losses of 0.17% to 2,917.87/USD. The BRL weakened 0.50% to 3.0879/USD and the MXN depreciated 0.52% trading at 19.10/USD. The CLP bucked the regional trend closing at 659.03/USD (+0.21%). 
  • In rates, there was a widespread tightening movement across LatAm. In DI Futures, the Jan-18 decreased 3bps to 9.96% and the Jan-20 went down 6bps to 9.70%. In Camara swaps, the 1-year fell 4bps to 2.83% and the 5-year decreased 3bps to 3.64%. The curve now implies roughly 70bps in rate cuts by YE17, whereas we project the policy rate to end the year at 2.50%.

Macro Backdrop

BRAZIL
  • BCB placed the full offering of 10,000 FX swaps. After closing, the Central Bank called a roll over auction of up to 10,000 contracts on March 22.
MEXICO
  • Mexico’s economic growth moderated in 2016, in spite of a pick-up of private consumption. Annual GDP growth slowed down moderately, to 2.3% (2015: 2.6%), underpinned by stronger private consumption (2.8%, 2015: 2.3%). Domestic demand growth, nevertheless, weakened (to 2%, 2015: 2.4%) as the strength of private consumption was wiped out by softer private investment (2.2%, 2015: 8%) and the fiscal consolidation (public sector demand contracted 1.4%). On the external side, both exports of goods and services (1.2%, 2015: 10.3%) and imports (1.1%, 2015: 8.6%) weakened, with the contribution of net exports to GDP growth shrinking to zero (2015: 0.6 p.p.). The variation of inventories also contributed nil to GDP growth (2015: -0.1p.p.). 
  • Looking ahead, we expect growth to slow down to 1.6% in 2017 with stronger exports falling short to offset the deterioration of domestic demand.  We believe that higher inflation (eating through real wages), tighter macro policies (higher domestic rates and fiscal consolidation) and the uncertainty surrounding future trade relations with the U.S. will hurt consumption and investment. However, stronger growth in the U.S. will likely continue to act as a buffer by boosting Mexico’s manufacturing exports. Full Report

Market Developments 

  • GLOBAL MARKETS: Risk off day as the market reassessed the timing for the implementation of the US government pro-growth agenda. American equity markets were deep on the red, volatility gauges increased and US Corporate Credit Spreads went up. In yields, Treasuries tightened as the 5-year went to 1.96% (-3bps) and the 10-year to 2.43% (-3bps). Global Markets Tracker
  • CURRENCIES & COMMODITIES: Metals sold off as iron ore prices fell 3.20% and copper decreased 2.08%. Authorities in Beijing and four provincial Chinese capitals have introduced further property tightening measures including lending curbs and purchase restrictions. Also contributing to the fall in copper prices was the normalization of operations at Indonesia’s Grasberg mine and talks to try to end the strike at Chile’s Escondida mine. In the FX realm, the DXY fell 0.69%, as the EUR strengthened 0.70% amid easing concerns with French politics. In LatAm FX, most currencies under our coverage depreciated on the commodities rout. The COP posted losses of 0.17% to 2,917.87/USD. The BRL weakened 0.50% to 3.0879/USD and the MXN depreciated 0.52% trading at 19.10/USD. The CLP bucked the regional trend closing at 659.03/USD (+0.21%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads for the 5-year tenor increased across the board again. Chilean spreads went up 2bps to 78bps, and Mexican increased 3bps to 143bps. Colombian country risk deteriorated further to 145bps (+4bps). Brazil CDS increased the most in the region, again, to 235bps (+5bps). External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve tightened in the session. In DI Futures, the Jan-18 decreased 3bps to 9.96% and the Jan-20 went down 6bps to 9.70%. Accordingly, breakevens fell (5-year: -4bps to 4.63%). Brazil Rates Tracker
  • LOCAL RATES - Mexico: Market reopened after Monday’s national holiday. Mexican yields decreased 3bps, on average. In TIIE swaps, the 1-year fell 3bps 7.13% and the 5-year went to 7.36% (-3bps). Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, yields traded lower. In Camara swaps, the 1-year fell 4bps to 2.83% and the 5-year decreased 3bps to 3.64%. The curve now implies roughly 70bps in rate cuts by YE17, whereas we project the policy rate to end the year at 2.50%. Chile Rates Tracker In Colombia, the market reopened after Monday’s national holiday. In IBR swaps, most yields decreased with the belly falling the most. The 2-year fell 10bps to 5.35% and the 5-year fell 5bps to 5.58%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, the IPCA-15 consumer inflation preview for March will be released (Wed.). We forecast a 0.15% m/m rise, with year-over-year inflation decelerating to 4.7% from 5.0%. Then, FGV’s industrial business confidence preview for March will be released (Thu.), for which we expect a 2.5% m/m rise in seasonally adjusted terms, consistent with the 2.9% rise in the CNI confidence release. Moreover, external accounts data will be published (Fri.). We expect a current account surplus of USD 400 million in February, above the USD 1.9 billion deficit in the same month last year. Also, we expect direct investment in the country (former FDI) to sum up to USD 4.5 billion in February. Finally, February’s tax collection may be released sometime during the week. We forecast BRL 93 billion in tax collections, or a 1.1% increase in real terms. 
  • In Mexico, the statistics institute (INEGI) will publish CPI inflation figures for the first half of March (Thu.). We expect bi-weekly inflation to advance 0.25%, driven by the lagged effects of the Mexican Peso’s depreciation and higher agricultural prices, partly offset by a decrease of gasoline prices. Assuming our forecast is correct, headline inflation would post 5.18% year-over-year in the first half of March (up from 5.02% in the second half of February). Then, INEGI will announce the growth rate of January’s retail sales (Fri.), which we forecast at 7% y/y (December: 9%). 
  • In Colombia, the highlight of the week will be central bank’s monthly monetary policy meeting (Fri.). We believe the conditions are conducive for the central bank to speed up the easing process by cutting the policy rate by 50 basis points to 6.75%. Then, Fedesarrollo will publish the February retail and industrial confidence levels (Thu.). We expect confidence levels to be strained ahead as economic activity remains at low levels. Moreover, the January activity coincident indicator (ISE) will be published (Fri.). As the economy adjusts to the terms of trade shock, growth decelerated in 2016 (December 2016: 1.0% y/y).

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa



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