Itaú BBA - Uncertainty over North American trade relations weighs on the MXN

Latam FI Strategy Daily

< Back

Uncertainty over North American trade relations weighs on the MXN

January 26, 2017

The MXN was the regional underperformer (-1.13%), amid growing uncertainties over the U.S.-Mexico trade relationship.

With information available until 6:30pm Brasilia time

Highlights

  • The MXN was the regional underperformer (-1.13% to 21.31/USD), amid growing uncertainties over the U.S.-Mexico trade relationship. On the other hand, yields behaved relatively well, despite the strong intra-day volatility of the MXN. In TIIE swaps, yields narrowed 2-4bps in the 9-m/7-yr area. Breakevens staged a downward correction: the 5-year narrowed 13bps to 4.69% as the 4y1y dropped 18bps to 4.65%.
  • The other currencies under our coverage all depreciated. Both the BRL and the CLP depreciated 0.14% to 3.1744/USD and 649.99/USD, respectively, while the COP weakened 0.46% to 2,940.00/USD.
  • Brazilian rates widened across the curve, consistent with the BRL weakening and the large LTN auction (530 DV/01). In DI futures, the Jan-19 rose 5bps to 10.47%.

Macro Backdrop

BRAZIL

  • Consumer confidence reaches the highest level since October 2015. Consumer confidence (FGV) rose 8.5% m/m in January (previous: 6.2%), amid rises in both the current situation component (+4.4%) and the expectations component (+10.4%). The intention to purchase durable goods was up 7.9%. The percentage of people reporting that jobs are hard to get retreated to 97.4% (previous: 98.4%) in the month, remaining at high levels though. In all, confidence shows stabilization at levels higher than last year, driven by the expectations component.
  • Delinquency remained stable in December. The daily average of new non-earmarked loans declined 4.5% m/m in real terms in December, driven by declines of 3.2% in loans for non-financial corporations and 5.4% in household loans, adjusted for seasonality. Meanwhile new earmarked loans expanded 2.0% m/m, as new loans for non-financial corporations fell 6.9%, while new household loans increased 10.2%. Delinquency in non-earmarked loans rose 0.1 p.p. to 5.5% among non-financial corporations and receded 0.1 p.p. to 6.0% among households, seasonally adjusted. As for earmarked credit, delinquency increased to 1.9% (previous: 1.8%) among non-financial corporations and fell to 1.8% (previous: 1.9%) among households. Interest rates charged on non-earmarked loans dropped to 52.0% (previous: 54.0%), declining for non-financial corporations and households alike. Meanwhile, average interest rates charged on earmarked loans advanced to 10.7% (previous: 10.6%), falling for non-financial corporations and increasing for households. Full Report
  • The BCB allotted USD 750 million in regular FX swaps. After closing, the BCB called a rollover auction of up to USD 750 million on January 27.

MEXICO

  • Mexico’s trade balance posted a USD 28.2 million surplus in December, bringing the 12-month rolling deficit to USD 13.1 billion in 2016 (2015: USD 14.6 billion). During 4Q16, the trade deficit reached USD 6.8 billion (seasonally adjusted and annualized), down from USD 13.5 billion in 3Q16, thanks to a marked improvement in the non-energy deficit. In turn, the non-energy deficit was due to an 11.2% q/q saar gain in manufacturing exports (the third consecutive quarterly growth), while non-oil imports increased by a modest 2.9% q/q saar. In all, the latest trade balance figure confirms that Mexico’s external accounts are improving on higher U.S. industry growth, a weaker MXN and, to a lesser extent, a gradual deceleration of internal demand. For 2017, as long as U.S. protectionism doesn’t materialize, we expect a further improvement. The U.S. economy will likely grow stronger next year, amid a more depreciated MXN relatively to 2016. The slowdown in internal demand due to lower real wages and uncertainty over U.S. trade policies would also contribute to reduce the external imbalance. On the other hand, a further drop of oil production is likely in 2017, offsetting higher oil prices and keeping the energy deficit wide. Full Report

CHILE

  • S&P revises outlook to negative. S&P affirmed Chile’s AA- long-term foreign currency rating, while also revising the outlook on the to negative from stable. This leaves Moody’s as the only agency that still has a stable outlook for Chile. S&P notes that the outlook revision reflects the risk that prolonged low economic growth could translate into larger fiscal deficits than currently projected by S&P, leading to continued increases in government debt and weakening the sovereign's financial profile. S&P highlights that although net government debt is still moderate in comparison with other similarly-rated sovereigns, it has consistently increased in recent years from near zero in 2012 to an expected 12% by 2018. S&P explains that the negative outlook reflects a 33% chance of a rating downgrade this year or in 2018. We view the outlook change as unsurprising, and Moody’s could follow (current rating: Aa3), but a rating downgrade remains outside our baseline. Full Report Below

Market Developments

  • GLOBAL MARKETS: The USD strengthened across the board (DXY: 0.31%), as all G-10 and most EM pairs weakened. Other risky assets had mixed performances: American equity markets were firm in the green, whereas European and EM indexes mostly traded lower. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Oil posted solid gains, as Brent rose 2.11% to USD 56.24/bbl. High-beta currencies weakened in average terms (EMFX: -0.39%; commodity FX: -0.80%). In LatAm, the BRL and the CLP depreciated 0.14% to 3.1744/USD and 649.99/USD, respectively. The COP also weakened (-0.46% to 2,940.00/USD), while the MXN was the regional underperformer (-1.13% to 21.31/USD), amid growing uncertainties over the U.S.-Mexico trade relationship. FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: Credit spreads edged up 2bps in Brazil (255bps), Chile (81bps) and Colombia (154bps). Despite the MXN’s volatility, Mexican risk premium only widened 1bp (to 168bps). External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: Nominal rates were pressured  by the BRL's weakening and the large LTN auction (530 DV/01). In DI futures, the Jan-19 rose 5bps to 10.47% and the Jan-25 widened 8bps to 11.05%. Linkers widened 3bps in average; the NTN-B 2022 rose 3bps to 5.71%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican yields behaved relatively well, despite the strong intra-day volatility of the MXN. In TIIE swaps, yields narrowed 2-4bps in the 9-m/7-yr area. The real rates curve (Udibonos) bear-flattened as the 2022x2040 spread tightened 6bps. As an upshot, breakevens staged a downward correction: the 5-year narrowed 13bps to 4.69% as the 4y1y dropped 18bps to 4.65%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: Chilean rates widened 3bps in average past the 2-year. In Camara swaps, the 5-year increased 4bps to 3.63%. Chile Rates Tracker In contrast, Colombian rates narrowed 3-4bps for the same sector; 10-year IBR swaps fell 3bps to 6.38%. Colombia Rates Tracker

Friday Events 

  • In Brazil, December’s tax collection may be released. We forecast BRL 125 billion figure.
  • In Colombia, Banrep will hold its first monetary policy meeting of 2017. Following the surprise rate cut in December, we expect Banrep to implement 25-bp a cut, taking the rate to 7.25%.

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editor: Eduardo Marza


Macro Reports

CHILE – S&P also revises outlook to negative

Last month, Fitch Ratings affirmed Chile's long-term foreign currency rating at 'A+', but revised the outlook to negative. Today, S&P has followed suit, affirming its ‘AA-´long-term foreign currency rating, while also revising the outlook on the Republic of Chile to negative from stable. This now leaves Moody’s as the only rating agency that still has a stable outlook for Chile. S&P notes that the outlook revision reflects the risk that prolonged low economic growth could translate into larger fiscal deficits than currently project by S&P, leading to continued increases in government debt, weakening the sovereign's financial profile. S&P highlights that although net government debt is still moderate in comparison with other similarly-rated sovereigns, it has consistently increased in recent years from almost zero in 2012 to an expected 12% in 2018. S&P explains that the negative outlook reflects a 33% chance of a rating downgrade this year or in 2018. The rating could be lowered under certain conditions: if the government fails to contain fiscal deficits, resulting in higher annual increase in general government debt than it currently forecasts over the next three years; potential negative external shocks, or fiscal slippage, could lead to larger-than-expected CAD, causing Chile's external liquidity ratios to deteriorate. Similarly, unexpected steps that weaken Chile's commitment to rules-based fiscal and monetary policies could lower investor confidence and contribute to an erosion of the government's financial profile, as well as hurt external liquidity. On the other hand, S&P outlines the conditions that would warrant a reversion to a stable outlook: if the central government is able to pursue its gradual fiscal consolidation plan while enhancing business confidence to encourage investment and accelerate economic growth. Itaú views the outlook change as unsurprising, and Moody’s could follow (Moodys Aa3), but a rating downgrade remains outside the realm of our base case

Vittorio Peretti 


 

The Week Ahead in Latam

Brazil

Industrial business confidence (FGV, preview) for January will be released on Tuesday. We expect a 2.0% seasonally-adjusted increase, based on the already-released CNI confidence reading (+5.0% mom, using our seasonal adjustment).

The Central Bank’s balance of payments report will hit the wires on Tuesday. We expect the current account to post a deficit of USD 4.8 billion in December, above the USD 2.4 billion observed in December last year when a strong trade surplus was fueled by an oil rig export. Year-over-year, the services and income deficits are also likely to increase. In 2016 as a whole, the current account deficit is expected to reach USD 22.6 billion, down from USD 59 billion in 2015. The strong adjustment in the external accounts last year was mainly due to slower economic activity. For the next few years, we forecast a growing current account deficit, though without compromising external sustainability. Direct investment in the country (DIC) is expected to total USD 9.0 billion in December. If this result is confirmed, DIC will amount to USD 73 billion in 2016 (slightly below USD 75 billion in 2015).

December’s tax collection may be released sometime during the week. We forecast BRL 125 billion in tax collections, which translates to a 2.9% increase in real terms (+0.1% in November). Despite the increase in the month, tax collection declined around 6.0% in real terms in 2016, impacted by weakness in economic activity, especially in household consumption and the labor market, where Brazil’s tax burden is concentrated.

Colombia

On Tuesday, DANE will publish the November trade balance. The trade deficit continues to narrow, lowering Colombia’s vulnerability to external shocks. As of October, the 12-month rolling trade deficit narrowed to USD 13.2 billion from USD 15.9 billion in 2015. The improvement is explained by a fast shrinking of the non-energy balance deficit, reflecting the internal demand slowdown. We expect a trade deficit of USD 1090 million, smaller than the USD 1.7 billion deficit recorded one year ago.

Fedesarrollo will publish the December retail and industrial confidence levels onTuesday. In November, business confidence remained divided with retail sentiment still in positive territory, while industrial confidence stayed pessimistic. Industrial confidence came in at -4.0% (0 = neutral) in November, below the -3.3% recorded on year before. On the other hand, retail confidence picked-up to 22.3%, from the 18.7% recorded in November 2015. Business confidence, in particular the industrial component, is likely responding to a slowing economy.

The central bank will hold its first monetary policy meeting of 2017 on Friday. Following the surprise rate cut in December, we expect the central bank to continue to lower the interest rate by 25 basis points to 7.25%. Colombia’s vulnerability to external shocks has diminished (lower current account deficit) and inflation continues to moderate in spite of the above-expectations reading in December. So, we anticipate the majority of the board will view recent developments as sufficient to continue to reduce the historically high real interest rate amid diminishing demand-side inflationary pressures.

Mexico

Starting the week, INEGI (the statistics institute) will publish CPI inflation figures for the first half of January. We expect inflation to spike 1.25% in the first half of January, driven by the 15% average increase of gasoline prices (“gasolinazo”) and peso depreciation. We also highlight the significant price increases of LPG and electricity; a 10% hike in the minimum wage; and higher local taxes in 14 of the 31 states of Mexico. The rise of the tortilla price (an important staple) will probably impact inflation in the second half of January. Assuming our forecast is correct, headline inflation would post 4.51% year-over-year in the first half of January (up from 3.36% in December).  

At the same time, INEGI will announce November’s monthly GDP proxy (IGAE). Based on coincident data – such as the rebound of industrial production recorded in November (1.3% year-over-year, -1.2% previously) and robust fundamentals for service sectors (mainly formal employment, remittances, and consumer credit) – we forecast IGAE’s growth at 2.5% year-over-year (up from 1.2% in October). A positive calendar effect also helped growth in November. 

Also on Tuesday, the National Association of Department Stores and Supermarkets (ANTAD) will publish December’s same-store-sales. In spite of higher inflation (which eroded real wages) and higher domestic interest rates, we believe ANTAD sales expanded 7% year-over-year in December (up from 5.9% in November). Formal employment accelerated in the last month of the year, and remittances from the U.S. have picked up significantly (probably out of concerns of future restrictions from the new U.S. administration).  

INEGI will announce the growth rate of November’s retail sales on Wednesday, which we forecast at 7.9% year-over-year (down from 9.3% in October). Overall, coincident indicators for private consumption – such as formal employment, consumer credit, and remittances – remained firm in November. Remittances actually picked up significantly.

Finally, INEGI will publish December’s trade balance on Thursday. We expect the trade deficit to continue narrowing at the margin, driven by an improvement in the non-energy balance which is explained by firmer manufacturing exports and softer non-energy imports (hit by the weak exchange rate). 

Itaú BBA Macro Team



< Back