Itaú BBA - USD weakens on market skepticism over fiscal impulse

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USD weakens on market skepticism over fiscal impulse

July 18, 2017

Accordingly, LatAm FX posted widespread gains in the session.

With information available until 6:30pm Brasilia time


  • The US dollar weakened across the board as another setback to the US healthcare negotiations reduced market expectations of sizeable fiscal stimuli in the US. The USD weakened 0.48% vis-à-vis G-10 currencies, 0.11% relative to EM FX and 0.33% compared to commodity-exporters. 
  • Accordingly, LatAm FX posted widespread gains in the session. The MXN is trading 0.64% stronger to 17.4748/USD. The COP appreciated 0.62% to 3,012/USD and the CLP posted gains of 0.64% to 655.50/USD. Finally, the BRL outperformed its peers, closing at 3.1565/USD (+0.82%). 

Macro Backdrop

  • The BCB placed the full offering of 8,300 FX swaps. After closing, the central bank announced another roll over auction of up to 8,300 contracts (USD 415 million) on July 19. 


  • Banrep’s July monthly survey shows inflation expectations are broadly stable from the previous month. The survey shows that the 2017 inflation expectation at 4.30% (4.32% previously), meanwhile, the 2018 inflation expectation was stable at 3.5% for the third consecutive month. The 2-year horizon inflation expectation posted the most notable change, rising to 3.50% from 3.20% last month. The core inflation expectation measure (excluding food prices) increased to 3.5% for 2018 (3.18% previously) and to 3.22% for a 2-year horizon (3.06% previously). With expectations for 2018 remaining comfortably in the central bank’s 2%-4% target range, there remains scope for some additional easing of the monetary policy rate. The surveyed respondents expect a 25bp rate cut this month, followed by a further cut of the same magnitude in August taking the policy rate to 5.25% (in line with our view). Thereafter, analysts expect the central bank to then stay on hold until January when rate cuts every other month would take the policy rate to 4.5% (also broadly in line with our baseline scenario). The central bank cut the policy rate by 50bps last month to 5.75% as growth concerns increased. Following last month’s decision, activity indicators for the month of May continued to disappoint, yet numerous board members have communicated that they see the job of monetary policy nearly complete. As favorable base effects for inflation fade in 2H17, we see limited scope for additional easing this year. 
  • In June, consumer confidence competed 18 consecutive months in pessimistic territory (below 0), and remained at a similar level to one year ago. However, consumer confidence has improved from the historical low reached in January (-30.2). Think-tank Fedesarrollo’s consumer sentiment index came in at -11.7 points, similar to the -11.3 points one year before (May: -16.9). Over the last 12 months, consumer expectations are less negative (-10.9 vs. -11.7) as individual households continue to see their situation improving within the next year. Low inflation and falling interest rates could sustain an improving individual outlook. Meanwhile, the current economic conditions worsened to -13 points from -10.8 one year ago. Overall, the weak consumer confidence levels hint that a sudden recovery of private consumption-related activity is unlikely. We expect growth of 1.6% this year (2% last year), and note downside risks to this outlook. 
Market Developments 
  • GLOBAL MARKETS: The dollar weakened (DXY: -0.48% to 94.67 - weakest level since August 2016) amid another setback to the US healthcare negotiations. Furthermore, US treasuries narrowed (5-year: -4bps to 1.82%) reflecting reduced market expectations of sizeable fiscal stimuli in the US. The Fed funds implied probability of a rate hike for the remainder of 2017 fell to 39% from 42% as of Monday. Global Markets Tracker
  • CURRENCIES & COMMODITIES: Commodities were on the green in the session. Oil prices edged higher (WTI: +0.56% to USD 46.28/bbl) and metals posted gains (copper: +0.13%; iron ore: +0.21%). LatAm FX (+0.71%) was boosted by the weaker dollar and stronger commodities (Commodity FX: +0.33%). The MXN is trading 0.64% stronger to 17.4748/USD. The COP appreciated 0.62% to 3,012/USD and the CLP posted gains of 0.64% to 655.50/USD. Finally, the BRL outperformed its peers, closing at 3.1565/USD (+0.82%). FX & Commodities Tracker
  • CDS SPREADS & EXTERNAL BONDS: LatAm credit spreads narrowed marginally. For the 5-year tenor, CDS in Chile and Brazil stood flat at 66bps and 222bps, respectively. In Colombia and Mexico, spreads inched down 1bp to 134bps and 108bps, respectively. External Bonds and CDS Tracker
  • LOCAL RATES – Brazil: The Brazilian curve bull flattened in the session. In DI futures, the Jan-18 fell 2bps to 8.65% and the Jan-21 went down 4bps to 9.58%, below mid-May levels. Real rates also narrowed, as the May-21 fell 4bps to 5.07%. Brazil Rates Tracker
  • LOCAL RATES - Mexico: Mexican yields widened in the session. In TIIE swaps, while belly was pressured the most as the 3-year went up 3bps to 6.84%, long ones inched up (10-year: +1bp to 7.13%). Mexico Rates Tracker
  • LOCAL RATES – Chile and Colombia: In Chile, rates traded range bound with the belly under pressure. In Camara swaps, the 1-year was stable at 2.39% and the 3-year widened 2bps to 2.90%. Chile Rates Tracker In Colombia, the curve bear steepened in the session. In IBR swaps, the 1-year increased 4bps to 5.03% while the 10-year went up 6bps to 6.25%. Colombia Rates Tracker

Upcoming Events

  • In Brazil, July’s IPCA-15 consumer inflation preview will be released (Thu). We forecast a 0.08% monthly fall, with year-over-year inflation slowing to 2.9% from 3.5%. With this result, inflation will have reached 1.5% from January to July, well below the 5.2% recorded during the same time window last year. Then, FGV’s industrial business confidence preview for July will be released (Thu.). The results will be important to assess the impact of the more turbulent political scene. Still, June’s tax collection may be released sometime during the week. We forecast BRL 103.8 billion in tax collections, or a 2.6% increase in real terms. Moreover, the government will release its bimonthly revaluation report (Fri.), where it will update its forecasts for the 2017 primary result and may possibly announce a BRL 4 billion unfreeze on discretionary expenses. Onto the balance of payments report (Fri.), we expect a USD 1.3 billion current account surplus in June, topping last year’s deficit of USD 2.5 billion for the same month. We also expect direct investment in the country (DIC) to register inflows of USD 2.3 billion in June.
  • In Mexico, the Statistics Institute (INEGI) will announce June’s unemployment rate (Fri.). We expect the unemployment rate to post 3.5% (below the 3.9% level recorded in June 2016) indicating that labor market conditions remain tight. According to data reported by the Mexican Institute of Social Security (IMSS), formal employment has consistently grown above 4% year-over-year throughout the first six months of 2017. 
  • In Colombia, the trade balance for the month of May will be published (Wed.). We expect a trade deficit of USD 185 million, lower than the USD 0.7 billion deficits recorded one year ago. Ending the week, coincident activity indicator (ISE) for the month of May will be released (Fri.). The April indicator continued to reflect activity weakness as the seasonally adjusted series fell from the previous month for the fifth consecutive time. Annual year-to-date stands at 0.6% (2.7% in the 2016 equivalent period). 

Latam Macro Calendar

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

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