Itaú BBA - The CLP rallies to a 2-year high

Latam FI Strategy Daily

< Back

The CLP rallies to a 2-year high

August 28, 2017

The CLP (+1.05% to 628.30/USD) gained on rising copper prices (+1.11%) and falling oil crude.

With information available until 6:30pm Brasilia time

Highlights

  • As oil prices extended Friday losses (-2.08%) owing to Hurricane Harvey impact, that could reduce crude demand in refineries, the COP (-0.72% to 2,947/USD) and the MXN weakened while the CLP appreciated. Additionally, the MXN (-1.34% to 17.8538/USD) was further affected by Nafta-related concerns and the CLP (+1.05% to 628.30/USD) also gained on rising copper prices (+1.11%). Finally, the BRL posted losses of 0.17% to 3.1644/USD. 
  • The front end of the Brazilian curve narrowed 2-3bps as markets see a lower YE17 Selic. Also, according to Focus survey, inflation for this year fell 6bps to 3.45% and the YE17 Selic fell 25bps to 7.25% (see Macro Backdrop). In DI futures, the belly traded range bound (Jan19: +1bp to 7.83%). 
Macro Backdrop

BRAZIL
  • YE17 Selic expectations declined 25bps to 7.25%. Year-end Selic expectations receded 25bps to 7.25%, in line with our call, and did not change for 2018 (at 7.50%) and 2019 (at 8.00%). Also, according to Focus survey, inflation expectations declined to 3.45% (-6bps) for 2017, while it has remained flat for 2018 at 4.20% and 2019 at 4.25%. The BRL remained flat for 2017 (at 3.23/USD), while it has marginally appreciated to 3.38/USD for 2018 (from 3.39/USD) and to 3.44/USD for 2019 (from 3.45/USD). Finally, GDP growth expectations increased to 0.39% for 2017 (+5bps), and did not change for 2018 (2.00%) and 2019 (2.50%). See BCB Report
  • FGV’s construction survey shows a 2.0% confidence gain in August, driven by both current situation (1.1%) and expectations (2.7%). Three consecutive positive results suggest the sector was less affected by the recent increase in political uncertainty and continues to show a slow improvement. However, despite the improvement since 1Q16, the confidence remains far below the levels shown before the recession by 2013.
MEXICO
  • The 12-month trade deficit narrowed somewhat in July, in spite of deterioration at the margin. The trade balance posted a USD 1.5 billion deficit in July, surprising median market expectations (USD 1 billion) to the downside. As a result, the 12-month rolling trade deficit narrowed only slightly (to USD 8.7 billion, from USD 9 billion in June). Using the same measure, both the energy balance (a deficit of USD 15.4 billion, from USD 15.6 billion previously) and the non-energy surplus (at USD 6.7 billion; previous: USD 6.6 billion) improved somewhat. Nevertheless, we highlight that the 12-month non-energy surplus is currently standing at an all-time high.
  • We expect the 12-month trade deficit to narrow further (to USD 7 billion by the end of 2017, from USD 8.7 billion as of July). In our view, the driver will be solid export growth (due to a dynamic US economy) and, to lesser extent, weaker domestic demand. However, a relevant risk to our forecast is PEMEX’s falling oil output, which will continue pressuring the energy deficit. Full Report
Market Developments 
  • GLOBAL MARKETS: Risk off day as equity markets were on the red and the USD weakened against G-10 currencies (-0.51%). Global Markets Tracker
  • CURRENCIES & COMMODITIES: Oil dropped (WTI: -2.08% to USD 47.12/USD) as refineries in Texas closed after Hurricane Harvey. In LatAm FX, the BRL posted losses of 0.17% to 3.1644/USD. As oil prices dropped (-2.08%), the COP (-0.72% to 2,947/USD) and the MXN posted losses while the CLP appreciated. Additionally, the MXN (-1.34% to 17.8538/USD) was further affected by Nafta-related concerns and the CLP (+1.05% to 628.30/USD) also gained on rising copper prices (+1.11%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads for the 5-year tenor widened at the margin. In Chile, spreads were stable at 61bps. In Colombia, CDS increased 1bp to 128bps and in Mexico they widened 2bps to 106bps. Finally, Brazilian country risk went up 3bps to 200bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The front end of the Brazilian curve narrowed 2-3bps as markets see a lower YE17 Selic. Also, according to Focus survey, inflation for this year fell 6bps to 3.45% and the YE17 Selic fell 25bps to 7.25% (see Macro Backdrop). In DI futures, the belly traded range bound (Jan19: +1bp to 7.83%). Brazil Rates Tracker
  • LOCAL RATES - Mexico: The Mexican curve bear steepened as the trade deficit surprised to the downside (see Macro Backdrop). In TIIE swaps, the 5-year widened 3bps to 6.90%. Likewise, breakevens went up (5-year: +3bps to 3.71%). Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: The Chilean curve shifted 1-2bps downwards, tracking US treasuries. In Camara swaps, the 1-year fell 2bps to 2.35%. Chile Rates Tracker In Colombia, yields traded range bound. In IBR swaps, the 1-year was flat at 4.94% and the 5-year inched down 1bp to 5.56%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, the main highlight of economic activity will be the 2Q17 GDP (Fri.). We expect it to be flat on quarter-over-quarter seasonally adjusted terms. In addition, the nationwide unemployment rate for July will come out (Thu.), for which we expect a flat figure at 12.9% (according to our seasonal adjustment). Then, FGV’s monthly surveys for August on industry and services will be released through the week. The economic uncertainty indicator for August, also from FGV, will come out (Wed.). On fiscal accounts, the consolidated primary budget balance for July will come through (Wed.). We expect a BRL 14.0 billion deficit, with the central government result (due Tue.) posting a BRL 19.3 billion deficit. On external accounts, we expect August’s trade balance (due Fri.) to once again post a strong surplus (USD 4.3 billion). At last, after the approval of the TLP (new Long Term Interest Rate) base text in the Lower House Floor this week, Lower House Speaker Maia said some remaining amendments will be voted next Tuesday (August 29). The voting of this matter may start on the Senate as well. The provisional measure that creates the TLP expires on September 6. 
  • In Mexico, Banxico will publish the quarterly inflation report (3Q17) (Wed.). We expect the central bank to reaffirm that rate moves are unlikely in the near term. Still, the Ministry of Finance (Hacienda) will announce July’s fiscal balance (Wed.). We expect the fiscal deficit indicators to continue narrowing, as fiscal consolidation makes headway. 
  • In Chile, the national statistics agency (INE) will publish the industrial activity indicators for the month of July (Wed.). We expect manufacturing production to expand 2.7% from last year. Moreover, INE will publish the national unemployment rate for the quarter ending in July (Thu.). As we expect job growth dynamics to endure, we see the unemployment rate reaching 7.0%. Then, the BCCh will publish the minutes of the August monetary policy meeting (Fri.). The minutes will build the base for the upcoming Inflation Report, providing details on the central bank’s evaluation of inflation dynamics and the course for monetary policy. Going forward, the national statistics agency (INE) will publish the private consumption activity indicators for July (Fri.). We expect the commercial activity index to have increased 3.5% from last year.
  • In Colombia, the unemployment rate for the month of July will be released (Thu.). We expect the urban unemployment rate to rise to 10.7% in July. Then, Banrep hosts its monthly monetary policy meeting (Thu.). We expect a 25-bp cut to 5.25%, the last expected move for the year as the board will likely wait for inflation to revert to a downward trend early next year before engaging in further policy rate cuts. 
  • In Argentina, the INDEC will publish the manufacturing and construction data for July (Thu.). Then, tax collection for August will see the light (Fri.). We expect taxes to increase 30% yoy to ARS 215.5 billion in August. 

For details, refer to our Monthly Strategy Report.

For details on Brazilian markets, refer to our Handbook - First edition.

Today's editors: Eduardo Marza, Pedro Correa




< Back