Itaú BBA - The MXN sells off amid oil rout

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The MXN sells off amid oil rout

April 19, 2017

The Mexican Peso registered the largest daily loss in 3 months, depreciating 1.31% to 18.84/USD.

With information available until 6:30pm Brasilia time

Highlights

  • In LatAm FX, all currencies under our coverage depreciated. The MXN (-1.31% to 18.84/USD – largest daily loss in 3 months) and the COP (-1.06% to 2,869.55/USD) posted losses, tracking lower oil prices. The BRL (-1.42% to 3.1529/USD) was further affected on signs that more work will be needed to cement support for the Social Security bill (see Macro Backdrop) in the Lower House. 
  • The Brazilian curve bear-steepened as the BRL dwindled. In DI Futures, the Jan-18 went up 2bps to 9.56% and the Jan-21 increased 5bps to 9.93%.  
  • In Chile, markets were closed due to National Census. 

Macro Backdrop

BRAZIL
  • House of Representatives approved the State Debt Relief bill. The base text of the Fiscal Recovery Regime bill that seeks to bring relief to highly indebted states in exchange for structural adjustments in fiscal accounts was approved in the Lower House late Tuesday, with 301 votes in favor and 127 votes against. 
  • The Government announced further details on the proposed changes to the Social Security Reform. By the time we wrote this piece, the reading of the rapporteur's report in the Lower House Special Committee is taking place. According to our calculations, the proposed changes reduce the reform's total impact to 57% of the original proposal (vs. 77% as estimated by the Government). This is equivalent to an impact of 1.1 p.p. of GDP in 2025 compared to the scenario in which no reform is approved. Out of the 1.1 p.p., 0.85 p.p. come from lower expenditures (vs. 1.25% in Government’s estimates) and 0.25 p.p. from higher revenues (the government didn’t publish estimates of higher revenues coming from the reform). Alternatively, these changes reduce total savings in expenditures to BRL 431 billion from BRL 755 billion by 2025, in 2017 Brazilian Real (vs. a setback to BRL 630 billion from BRL 818 billion from government estimates).
  • According to both ours and the government’s estimates, spending on private Social Security (INSS) and BPC/LOAS would stay more or less stable as a percentage of GDP, if the minimum wage rises according to inflation. Although the dilutions make it harder for the government to comply with the spending ceiling especially after 2021, the altered reform could still be seen as an important step in avoiding an explosive trajectory in Social Security expenditure. 
  • 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 20. 
GLOBAL
  • Macro Vision: France to remain in the Eurozone even if Le Pen wins. The upcoming French elections are unlikely to result in a victory for far-right candidate Marine Le Pen, though she is expected to make it to the run-off vote. Even if she manages to win the elections, a referendum on EU membership is highly unlikely since most of Le Pen’s aggressive measures are likely to be stopped by Parliament. Full Report

Market Developments 

  • GLOBAL MARKETS: Equity markets were mixed and Treasuries widened on a strong dollar day. The 5-year increased 4bps to 1.74% and the 10-year went up 4bps to 2.21%. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities traded lower (CRB futures index: -1.41%). Oil prices fell (WTI: -3.66% to USD 50.49/bbl) after the DOE report showed US gasoline stockpiles increased for the first time in nine weeks and as weekly US crude production hit its highest level since August 2015. In addition, the oil sell-off was also hit by the compounding effect of a stronger dollar (DXY: +0.34%). In LatAm FX, most currencies under our coverage depreciated again. The MXN (-1.31% to 18.84/USD – largest daily loss in 3 months) and the COP (-1.06% to 2,869.55/USD) posted losses, tracking lower oil prices. The BRL (-1.42% to 3.1529/USD) was further affected by signs that more work will be needed to cement support for the Social Security bill (see Macro Backdrop) in the Lower House. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm Credit spreads for the 5-year tenor traded range bound. CDS in Brazil and Colombia stood flat at 227bps and 137bps, respectively. In Chile and Mexico, spreads inched up 1bp to 79bs and 132bps, respectively. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve bear-steepened as the BRL dwindled. In DI Futures, the Jan-18 went up 2bps to 9.56% and the Jan-21 increased 5bps to 9.93%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican yields traded higher in the session. In TIIE swaps, the 1-year increased 7bps to 7.15% and the 5-year went 7bps up to 7.19%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, markets were closed due to national census. In Colombia, rates traded lower at the margin. In IBR Swaps, the 9-month stood flat at 5.69% while the 5-year decreased 2bps to 5.31%. Colombia Rates Tracker

Thursday Events

  • In Brazil, the IPCA-15 consumer inflation preview for April will be released. 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. 
  • In Colombia, the trade balance for the month of February will be published. We expect a trade deficit of USD 824 million, smaller than the USD 1.0 billion deficit recorded one year ago.

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa




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