Itaú BBA - The CLP outperforms on solid Chinese trade data

Latam FI Strategy Daily

< Back

The CLP outperforms on solid Chinese trade data

June 8, 2017

The CLP strengthened 0.45% to 666.06/USD on the back of higher copper prices

With information available until 6:30pm Brasilia time


  • The CLP strengthened 0.45% to 666.06/USD on the back of higher copper prices. The metal posted gains as Chinese imports in May rose 14.8% yoy, topping the most optimistic forecast. Moreover, the MXN is trading 0.15% stronger to 18.20/USD – level last seen in mid-August 2016. The COP weakened 0.10% to 2,919.29/USD. Finally, the BRL appreciated 0.25% to 3.2615/USD. 
  • In rates, Andeans widened in the session. In Chile, the 1-year Camara swap went up 2bps to 2.49%; in Colombia, the 1-year IBR swap increased 4bps to 5.14%. In Mexico, on the other hand, yields narrowed as the 5-year TIIE swap fell 4bps to 7.15%. In Brazil, rates traded range bound as the Jan-19 inched up 1bp to 9.41%.

Macro Backdrop

  • Paper cardboard dispatches (ABPO) rose 3.2% mom s.a. in May (our seasonal adjustment), up 5.8% yoy. It is one of the two most important coincident indicators for industrial production (the other is traffic of heavy vehicles). The result is better than other industrial production coincident indicators already released, so we raised our industrial production forecast to 0.1% mom/sa in May (from -1.0% before ABPO’s release). 
  • The reading of the labor reform report on the Senate’s Social Affairs Committee (CAS) was postponed to next Tuesday (June 13). 
  • The BCB placed the full offering of 8,200 FX swaps. After closing, the central bank called for a roll over auction of up to 8,200 contracts on June 9. 
  • Mexico’s CPI fell between April and May, which is usually the month of lowest inflation in the year (because of the seasonality of electricity tariffs), but it did so by much less than in previous years. The CPI posted a -0.12% monthly variation - slightly above our forecast (-0.13%), which matched market expectations - with the 23.3% reduction of regulated electricity tariffs by the Federal Electricity Commission (CFE) fully accounting for the sequential deflation (as it subtracted 51bps from the CPI print). Moreover, some tourism-related services - such as air transport (-4.5%), hotels (-3.2%), and tourism services (-8.9%) - posted significant price corrections, reflecting the end of the Easter holidays in April. Low octane gasoline prices also fell (-0.6%), and they would have fallen more had the government not adjusted (increased) the excise tax to smooth out variations (a practice that is in place since February). Conversely, the hike of regulated interurban transport fares (“colectivo”), by 4.8%, stood out as the item with the largest positive contribution to inflation (9bps). Agricultural prices and core goods (tradables) also contributed positively to monthly inflation (11bps and 17bps, respectively). Overall, sequential inflation continues consistently exceeding its 5-year median. Annual headline inflation increased to 6.16% year-over-year (from 5.82% in April) while core inflation increased less, to 4.78% (from 4.71%). 
  • We expect annual inflation to decrease to 5.4% by the end of 2017. The appreciation of the MXN in 2017, which has recently reached stronger levels following the market-friendly outcome of the regional elections (MXN now 12% year-to-date stronger, compared to the 19% depreciation observed in 2016), will be the main factor that will help to bring down inflation. Of course, weaker activity (particularly domestic demand) in coming quarters will also help; and the significantly tighter monetary policy (375bps in rate hikes since December 2015), will probably keep inflation expectations in check. In this context, we see only two additional 25-bp rate hikes before the Central Bank’s monetary tightening cycle ends. Full Report
  • We publish our scenario review for the month of June. Growth surprised to the upside in 1Q17, but we see signs of weakening at the margin. Investment is already deteriorating, amid the uncertainty surrounding bilateral relations with the US and fiscal consolidation, which will likely have negative second-round effects in the labor market. If this happens, consumption is also bound to slow down. Also, we expect Banxico to deliver two more 25-bp hikes in 2017 (the next one in June, in lockstep with the Fed). Full Report
  • Consumer price inflation remained low in May, as expected. Inflation remained below the center of the 2%-4% range around the target for the eighth consecutive month with tradable inflation falling further on the back of a stable CLP, while non-tradable inflation picked-up slightly (to a still moderate level). Prices increased 0.1% from April to May, below the 0.2% gain recorded one year ago. Inflation in the month was lifted by the 25.7% increase in prices for tourism packages (contributing 0.19 p.p. to the total monthly gain). Clothing and apparel alongside transport prices were the main drags in the month (combined contribution of 0.11 p.p.). Excluding food and energy, prices rose 0.3% in the month (-0.1% in May 2016). Annual inflation came in at 2.6%, slightly down from the 2.7% recorded in the previous month. 
  • We continue to see inflation ending the year at 2.8% (2.7% in 2016) and to be at the 3% target by year-end 2018. This would lead the central bank to stay on hold at 2.5% for the remainder of the year and well into 2018, before beginning a gradual normalization of monetary policy. For June, we preliminarily estimate consumer inflation at 0% month-over-month, with prices for tourism packages likely falling after an unusual high increase in May. For June, we preliminarily estimate consumer inflation at 0% month-over-month, with prices for tourism packages likely falling after an unusual high increase in May. Full Report
  • We publish our scenario review for the month of June. The central bank cut the policy rate by 25bps to 2.5% at its May meeting, and the monetary policy report published shortly afterward gave clear indication that the current easing cycle has concluded. With inflation set to stay low and activity faltering, there remains a possibility that further easing may materialize before a normalization process begins. Full Report

Market Developments 

  • GLOBAL MARKETS: The ECB upgraded the Eurozone economic outlook to broadly balanced and removed its “lower rate” bias, as expected. In the Q&A, President Draghi reiterated the central bank is “ready to lower rates if things worsen”. Hence, the EUR depreciated 0.38% and EONIA rates slightly narrowed (5-year: -1bp to -0.06%). Global Markets Tracker
  • CURRENCIES & COMMODITIES: Copper prices increased 2.47% after stronger than expected Chinese trade data. In May, imports rose 14.8% yoy, topping the most optimistic forecast. Also, oil prices (WTI: -0.02% to 45.71/bbl) marginally fell. In FX, most currencies under our coverage appreciated. On the back of higher copper prices and lower oil, the CLP strengthened 0.45% to 666.06/USD, outperforming its LatAm peers. The COP weakened 0.10% to 2,919.29/USD. Moreover, the MXN is trading 0.15% stronger to 18.20/USD – level last seen in mid-August 2016. Finally, the BRL appreciated 0.25% to 3.2615/USD. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm Credit spreads for the 5-year tenor were broadly stable. Mexican, Chilean and Colombian spreads stood flat at 111bps, 69bps and 127bps, respectively. In Brazil, however, country risk narrowed 2bps to 237bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Brazilian yields traded range bound again. In DI futures, most rates stood flat (Jan-18: at 9.31%) while very long ones went up at the margin (Jan-23: +2bps to 10.94%). Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican rates narrowed in the session. In TIEE swaps, short rates fell 1-2bps (1-year: -2bps to 7.44%), long ones went down 3-5bps (5-year: -4bps to 7.15%). Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, rates widened. In Camara swaps, the 1-year went up 2bps to 2.49% and the 10-year widened 5bps to 4.05%. Chile Rates Tracker In Colombia, most rates increased as well. In IBR swaps, the 1-year widened 4bps to 5.14% and the 5-year went up 9bps to 5.22%. Colombia Rates Tracker

Friday Events

  • In Brazil, May’s IPCA consumer inflation will be released (Fri.). We forecast a 0.48% monthly rise, with year-over-year inflation slowing to 3.8% from 4.1%. Moreover, the electoral court (TSE) will have extraordinary sessions  to judge the Dilma-Temer ticket trial on Friday (9h and 14-18h, SP time) and Saturday (9-12h, 14-18h and 19h).
  • In Mexico, INEGI will publish April’s industrial production (Fri.). We expect a 2.8% year-over-year contraction (down from a 3.4% expansion in March), based on a deterioration of coincident indicators and a negative calendar effect. 
  • In Colombia, Banrep will release the minutes of the monetary policy meeting held in May (Fri.). At the meeting, a split board decided to cut the policy rate by 25-bps to 6.25%, less aggressive than the 50-bp cut in the previous month. A tick-up in inflation expectations and sticky core consumer prices have created some unease in the board. Nevertheless all board members were in favor of further easing. The minutes will likely reflect heightened concern for inflation dynamics.

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa

< Back