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Upbeat global sentiment supports LatAm FX

February 15, 2017

The CLP appreciated to 639.08/USD, as BCCh stood on hold on Tuesday's meeting, surprising a considerable part of the market.

With information available until 6:30pm Brasilia time

Highlights

  • Risk appetite increased on the back of stronger than expected US data and remarks regarding the government's pro-growth agenda from Speaker Ryan (see below). In LatAm FX, the BRL outperformed, trading at 3.0574/USD (+0.91%), a level last seen on June 2015. The CLP appreciated 0.41% to 639.08/USD, as BCCh stood on hold on Tuesday's meeting, surprising a considerable part of the market that was projecting a cut (see Macro Backdrop).
  • In rates, DI futures narrowed (Jan-21: -2bps to 10.24%). In Colombia, the front end of the IBR curve tightened, consistent with the consumer confidence drop (see Macro Backdrop). The 1-year tightened to 6.62% (-2bps).

Macro Backdrop

BRAZIL
  • According to the IBGE survey (PMS), service sector real revenue increased 0.6% m/m in December. This implies a decrease of 5.7% y/y. Although below our expectation (-4.4%) and market consensus (-4.4%), the more important activities for our models were in line (transportation increased 0.4% m/m and IT & communication services decreased 1.7% m/m). We maintain our forecast for IBC-Br in -0.3% m/m in December (released on February 16). 
  • Terms of trade placed strong increase in January. According to Funcex, terms of trade increased 4.8% m/m, after a slight fall in December. Export prices increased 5.1% m/m while import prices increased only by 0.3%. Also, exported quantity expanded 17.4% in January, led by basic goods (30.0% m/m) and fuels (109.8% m/m). Imported quantity increased in the month as well, posting gains of 2.2%. 
  • BCB placed the full offering of 6,000 FX swaps. After closing, the Central Bank called a roll over auction of up to 6,000 contracts on February 16. 
CHILE
  • As we predicted, BCCh left its policy rate at 3.25%. The communiqué announcing the decision retained a loosening bias, signaling a further easing would continue in the short term. The board highlighted that short-term inflation expectations for the relevant horizon remain anchored, but closer term expectations are below the 3% target. Meanwhile, the board notes activity is weak and the labor market continues to gradually adjust. The press release noted the fall in long-term rates and the appreciation of the CLP. The improvement in international financial conditions supported the region, as copper prices increased since last month due to supply-side shocks, and oil remains broadly stable. The incoming February inflation figure will be the key decider at the March meeting, when we expect BCCh will likely cut rates by 25-bps. We forecast the full loosening cycle to encompass 100-bps cuts this year, taking the policy rate to 2.5% before yearend. Full Report
COLOMBIA
  • Consumer confidence reaches the lowest since the initiation of the survey in November 2001. Think-tank Fedesarrollo's consumer confidence came in at -30.2 points (previous: -10.7). As a result, consumer confidence completed 13 consecutive months pessimistic territory (0 is the neutral level). The breakdown shows that the evaluation of the current situation deteriorated to -33.1 points (one year before: -28.1). The anticipation that inflation will fall this year could spur an improvement in sentiment, but still high interest rates will contain this. We forecast the Colombian economy grew 1.8% last year (2015: 3.1%), with downside risks to the 2.3% recovery expected for this year. Full Report Below

Market Developments 

  • GLOBAL MARKETS: Risk-on day and increased volatility with equity markets strong on the green. US treasuries widened on the back of stronger than expected CPI and PPI data. US House speaker Paul Ryan dismissed market concerns over a delay on the tax reform debate, stating that “timeline on tax reform hasn’t changed, it’s on schedule”. Hence, US Treasuries (5-year and 10-year) increased to 2.01% (+5bps) and 2.51% (+4bps), respectively. The Fed funds futures implied probability of a March hike rose to 44% from 34% as of Tuesday. Global Markets Tracker
  • CURRENCIES & COMMODITIES: The CRB futures index registered gains (+0.51%), led by grains (soybean: +1.49%). Iron ore fell 1.00% and Brent went down to USD 55.76/bbl (-0.38%). In LatAm FX, all currencies under our coverage appreciated. The BRL outperformed, trading at 3.0574/USD (+0.91%), a level last seen on June 2015. The MXN slightly strengthened to 20.26/USD (+0.01%) and the COP appreciated to 2,871.73/USD (+0.10%). The CLP appreciated 0.41% to 639.08/USD, as BCCh stood on hold on Tuesday's meeting, surprising a considerable part of the market that was projecting a cut (see Macro Backdrop). FX & Commodities Tracker 
  • CDS SPREADS & EXTERNAL BONDS: All over LatAm, the 5-year tenor credit spreads widened. In Chile, spreads increased 2bps to 78bps. Colombian risk premium went up to 142bps (+4bps). Mexican CDS increased the most (+5bps to 150). Meanwhile, the Brazilian spread increased 3bps to 221bps. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: DI futures tightened. The Jan-21 went down 2bps to 10.24% while the Jan-25 decreased 6bps to 10.47%. The curve implies roughly 335bps in rate cuts for 2017. Breakevens also tightened (past 7-year), on average 6bps. Brazil Rates Tracker
  • LOCAL RATES - Mexico: The long end of the Mexican curve widened, again, tracking US yields. The 1-year widened 2bps to 7.27% and the 10-year went up 4bps to 7.99%. Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: Camara rates traded higher. The 1-year went up to 3.00% (+2bps) and the 10-year widened to 4.19% (+2bps). Chile Rates Tracker The front end of the IBR curve tightened, consistent with the consumer confidence drop to historical low (see Macro Backdrop). The 1-year tightened to 6.62% (-2bps) and the 7-year went up to 6.06% (+5bps). The curve now implies roughly 100bps in rate cuts by YE17. Colombia Rates Tracker

Upcoming Events

  • In Brazil, January's Current Account Balance will be released (Fri.).  We expect the current account deficit to reach USD 5.6 billion.  Then, direct investment in the country (former FDI) in January will be released (Fri.), for which we expect to sum up to USD 10 billion. Also, industrial business confidence (CNI) for February will be released (Thu.). Finally, the Central Bank’s activity index (IBC-Br) will be disclosed (Thu.). We expect the IBC-Br to drop 0.3% m/m in December.
  • In Colombia, the trade balance is on the limelight. DANE will publish the December trade balance (Fri.). We expect a trade deficit of USD 455 million, smaller than the USD 1.4 billion deficit recorded one year ago.

Latam Macro Calendar

For details, refer to our Monthly Strategy Report.

Today's editors: Eduardo Marza, Pedro Correa



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