Itaú BBA - The MXN rallies as oil prices recover

Latam FI Strategy Daily

< Back

The MXN rallies as oil prices recover

March 29, 2017

The MXN outperformed the majors in the session, trading at 18.71/USD (+1.73%) – strongest figure year to date.

With information available until 6:30pm Brasilia time


  • Commodities traded higher with oil prices increasing (WTI: +2.48% to USD 49.57/bbl). In FX, commodity-linked currencies posted gains. In LatAm FX, currencies under our coverage appreciated. The MXN outperformed the majors in the session, trading at 18.71/USD (+1.73%) – strongest figure year to date. The COP traded 0.92% higher to 2,881.90/USD and the BRL posted gains of 0.69% to 3.1197/USD. Then, the CLP strengthened 0.40% to 663.36/USD.
  • Ahead of the Monetary Policy meeting, the Mexican curve bull flattened. In TIIE swaps, the 9-month decreased 5bps to 7.10% and the 5-year fell 8bps to 7.26%. 

Macro Backdrop

  • Business confidence in the industrial sector (FGV) rose 3.3% m/m in March, in line with the preview. This way, there was improvement in both current situation (2.4%) and expectations (4.3%) components. Capacity utilization rose 0.1 p.p. (preview: 0.2 p.p.), remaining stable at historically low levels. Inventories (% excessive minus insufficient) fell further to 6.8% from 7.9% in February. Industrial demand rose 1.9%, while expected demand rose 7.4% (February: -5.8%). Eighteen out of twenty activities showed an increase (diffusion: 90%), consistent with a better aggregate result for confidence. Going forward, we expect the industrial confidence to increase further. See Itaú Heatmap
  • Service sector real revenue fell 2.2% in January, distorted by new methodology. According to the IBGE survey (PMS), services sector real revenue fell 2.2% m/m and 7.3% y/y in January, below market expectations (-4.5% y/y). The headline weakness may overestimate the underlying pace in services revenue, as the series for January 2017 onwards will be based on a 2014 census, while the series until December 2016 remains related to 2011. 
  • We see two consequences of this new methodology. First, the change between January 2017 and the previous months may hide a drift between real revenue under the old survey sample and the updated survey sample since 2014. We can’t estimate the impact, but the survey’s breakdown suggests a significant distortion arising from this drift. Second, underperforming components (eg. services offered to families, other services) have now a larger weight in the aggregate index. We estimate the change in weights accounts for 1.2 p.p. decline in the yearly headline. Therefore, the weak service sector real revenue headline must be taken with a grain of salt. This figure should not be read as a reliable signal of a new round of negative growth in economic activity. 
  • The central bank released its credit report for February. The daily average of new non-earmarked loans for consumers declined, falling 0.7% m/m. New business loans saw a greater contraction of 3.5%. The NPL ratio stood flat at 6.0% for consumers and fell to 5.3% (from: 5.5%) for businesses. Average interest rates on consumer loans increased 0.5 p.p. (to 73.2%) and inched down 0.1 p.p. for businesses (to 28.7%). Public banks’ market share declined to 55.8% from 55.9%. Recent data on loan concessions is consistent with stabilization in new consumer loans, while there are doubts as to whether new businesses loans have effectively stabilized. On the brighter side, business delinquency rates have been moderating. Full Report
  • 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 30. 

Market Developments 

  • GLOBAL MARKETS: Equity markets were on the green, volatility gauges decreased and long Treasuries tightened. For the 5-year tenor, Treasuries fell 3bps to 1.93% and for the 10-year, they decreased 4bps to 2.38%. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities traded higher with oil prices increasing (WTI: +2.48% to USD 49.57/bbl) as the weekly DOE report showed gasoline and distillate fuel inventories fell more than market expectations. Hence, commodity-linked currencies posted gains (Commodity FX: +0.58%). In LatAm FX, currencies under our coverage appreciated. The CLP increased 0.40% to 663.36/USD and the COP traded 0.92% higher to 2,881.90/USD. The BRL posted gains of 0.69% to 3.1197/USD. The MXN outperformed the majors in the session, trading at 18.71/USD (+1.73%) – strongest figure year to date. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Credit spreads for the 5-year tenor fell all across LatAm again. Colombian spreads inched down 1bp to 134bps. Both Mexican and Chilean country risk decreased 2bps, to 131bps and 72bps, respectively. CDS in Brazil fell the most in the session, to 229bps (-5bps). External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Brazilian yields traded lower in the session. In DI Futures, the Jan-19 fell 3bps to 9.43% and the Jan-25 decreased 4bps to 10.22%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Ahead of the Monetary Policy meeting, the Mexican curve bull flattened in the session. In TIIE swaps, the 9-month decreased 5bps to 7.10% and the 5-year fell 8bps to 7.26%. Accordingly, breakevens widened (5-year: +4bps to 3.78%). Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, rates had a very quiet session. In Camara swaps, most yields were flat (5-year: 3.60%) while some inched down (1-year: -1bp to 2.83%). Chile Rates Tracker In Colombia, rates fell in the session as, in IBR swaps, the 1-year went down 2bps to 5.79% and the 10-year decreased 5bps to 6.08%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, the Central Bank’s Quarterly Inflation Report (QIR) for 1Q17 will come through (Thu.). We expect the message conveyed in this QIR to leave the doors open for stronger rate cuts (we expect a 100-bp cut in April’s meeting). Then, January’s retail sales numbers will be published (Thu.). We expect a 0.4% m/m increase in core retail, whereas the broad segment will likely shrink: we expect a 0.9% decline, pulled down by weaker vehicle sales. Ahead on the week, the nationwide unemployment rate will hit the wires (Fri.). We expect the unemployment rate to reach 13.1% in the quarter ended in February. Finally, we count on a possible release of the BCB’s monthly activity index (IBC-Br) for January. We expect a 0.1% m/m decline. We forecast BRL 93 billion in tax collections, or a 1.1% increase in real terms. Then, the consolidated primary budget balance for February will come through (Fri.). We expect a BRL 19.6 billion deficit, with the central government result (Thu.) posting a BRL 20.6  billion deficit and regional governments and state-owned companies’ result amounting to a BRL 1.5 billion surplus (they don’t add up due to a discrepancy between the Treasury’s and the Central Bank’s expenditure accounting). Finally, the National Monetary Council may release the TJLP long term interest rate this week. We expect no change to the TJLP in the near future, currently at 7.5%. 
  • In Mexico, the Central Bank’s board will meet to decide on the reference rate (Thu.). Given the upward trend of inflation, we expect a 25-bp rate increase to 6.50%.  
  • In Chile, the national statistics agency (INE) will publish the industrial activity indicators for the month of February (Thu.). We expect manufacturing production to contract 3.3% from last year (January: -1.1%), negatively affected by metal related manufacturing amid a prominent mining strike. Then, the central bank will publish the minutes from the March monetary policy meeting (Fri.). In the meeting, the board of the central bank cut the policy rate by 25-bp to 3.25%, in line with expectations. Also, INE will publish the national unemployment rate for the quarter ending in February (Fri.). We expect to see some further evidence of labor market loosening with an increase in the unemployment rate to 6.3% from 5.9% in the equivalent period last year. 

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa

< Back