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Brazilian Central Bank intervenes in the FX market

Fevereiro 14, 2020

Following yesterday's auction, the BCB also announced that an auction of same magnitude (20,000 swap contracts) will take place today.

Talk of the Day


Following a sharp depreciation move, the Central Bank implemented a FX swap auction yesterday, between 10:10 AM and 10:20 AM, of a total 20,000 contracts (USD 1.0 billion). The BRL reached 4.38/USD by the time just prior the intervention, fell as low as 4.31/USD and finished the day at BRL 4.35/USD. The BCB also announced that an auction of same magnitude (20,000 swap contracts) will take place today, between 9:30 AM and 9:40 AM. 

Service sector revenue increased 1.6% yoy in December, broadly in line with market expectations (mkt: 1.5%, our call: 1.3%). At the margin, revenue dropped 0.4% mom/sa. The breakdown showed that two indicators that have a large weight in our GDP tracking, service offered to families and professional and administrative services, both declined strongly, by 1.3% mom/sa. The diffusion index (percentage of service data rising in the month) hit 33%. Our 4Q19 GDP tracking declined to +0.5% from +0.6% qoq/sa.

Day Ahead: The Central Bank will release its December’s economic activity indicator (IBC-Br) at 9:00 AM, for which we anticipate a 0.6% mom/sa decline (+1.0% yoy). Later in the day, between 9:30 AM and 9:40 AM, the BCB offers 20,000 contracts in a FX swap auction


As expected, Mexico’s central bank reduced its policy rate by 25-bps, bringing it to 7%. However, in contrast with the past few policy meetings, the decision was unanimous, as no board member voted for a 50-bp cut. This is consistent with the view expressed by Deputy Governor Esquivel – who had been backing a 50-bp cut – in the minutes of the previous decision that the window for a larger cut was narrowing (likely due to the expected year-over-year increase of headline inflation in January associated to tax hikes and an unfavorable comparison base). On the other hand, the two board members who have been more cautious kept voting for a 25-bp cut.  

In all, the board continues with a cautious tone, avoiding providing guidance on future policy moves amid above-target core inflation and risks for the inflation outlook. We continue to expect the policy rate to end this year at 6.0%, as a negative output gap and a stronger Mexican peso curb inflationary pressures. However, given the cautious tone of authorities we do not rule out that the central bank opts to intercalate the cycle with pauses, despite economic weakness and a still-high monetary policy rate. ** Full story here.     


As expected Peru’s central bank left its monetary policy rate unchanged in February, at 2.25%. Like in the previous decision, the central bank said in the statement that it expects inflation around 2.0% in the forecast horizon, with a “moderate downside bias” due to the possibility of lower than expected internal demand growth. On the global economy, the board sees lower risks related to trade war, but coronavirus outbreak impact is uncertain. Still, on the domestic activity front the central bank sounded more upbeat, commenting that public investment increased in January, while business confidence recovered from December. In this context, activity data is seen as consistent with a gradual narrowing of the output gap. Finally, the central bank repeats the message conveyed previously that it will evaluate adjustments to the monetary policy stance based on new information on inflation and on its determinants. We expect the central bank to cut interest rates once again during the first half of this year (to 2.0%), given well-behaved inflation amid below-potential growth.  


Activity growth in the final month of 2019 expectedly improved from the protest-hit month of November, but risks persist. Retail sales increased 7.1% yoy (4.4% previously), above the Bloomberg market consensus of 5.5% and close to our 7.3% forecast, as business operations normalized following the protests of November. Meanwhile, the manufacturing rebound, aided by a low base of comparison and a favorable calendar effect, underwhelmed with growth of 3.2% yoy (-1.5% previously; Bloomberg consensus: 3.7%; Itaú: 4.5%). As a result, we expect GDP growth of 3.3% in the final quarter of 2019, similar to the 3Q19 performance. Overall, consumption-related activity, supported by credit, drove growth last year, while manufacturing failed to capitalize on a weaker COP (partly due to a softer global demand). Despite protests losing momentum by December, activity at the margin continued to weaken, hampering the carry-over for 2020. Manufacturing slowed to 1.5% yoy last year, from 2.9% in 2018, as oil refining shrunk 2.3% (+4.0% in 2018). In the final quarter of last year, industrial production increased 1.1% yoy, down from 1.5% in 3Q19. At the margin, manufacturing fell 3.4% qoq/saar (+0.7% in 3Q17 and +4.0% in 2Q19). An uncertain global outlook poses a threat to manufacturing dynamism ahead. ** Full story here.  

Day Ahead: The institute of statistics will release GDP for the final quarter of 2019. Later in the day, the monthly coincident activity indicator (ISE) will be published for the month of December.


INDEC reported significantly below-expectation inflation for January. The CPI increased by 2.3% mom in the month, down from 3.7% in December and 1 pp below the Bloomberg consensus forecast of 3.3%. Deflation on medical products (following an agreement between the government and the pharmaceutical industry), frozen tariffs and a stable (official) nominal exchange rate contributed to disinflation. Annualized inflation for the quarter ended in January decelerated to 49.7%, from 55.7% in 4Q19. Last twelve month inflation fell to 52.9%, from 53.8% in December 2019. Core inflation also declined. Core item prices rose by 2.4% mom, led by food (particularly meat), affected by the reversal of the VAT in late 2019. At the margin, the core reading decelerated to an annualized 48.7% in the quarter ended in January, down from 57.0% in 4Q19. Regulated prices rose by 1.1% mom, leading to annualized inflation of 45.2% in the quarter. Prices for seasonal products rose by 3.6% mom (56.5% annualized 3MMA). Following the communication of the inflation reading, the central cut the Leliq rate to 44% from 48%. Looking ahead, we forecast 43% inflation for this year, down from 53.8% in 2019 and a Leliq rate at 30% by December this year. 


The minutes of the unanimous decision in January to hold the policy rate at 1.75% show elevated uncertainty is restricting the possibility to plot a course of action for the policy rate trajectory over coming months. Downbeat expectations for the economy would hold back the activity recovery, while doubt over which inflationary force would dominate in coming months (accumulated idiosyncratic CLP depreciation pressures or weakening internal demand) favor the accumulation of more information before the board alters its current on-hold stance. Nevertheless, there was a subtle signal that further loosening could once again become part of the discussion as one board member highlighted that the risk of having an inflation rate below the target could become significant in the coming quarters. We expect inflation to remain elevated in coming months, closer to 4%, but weakening internal demand would aid a moderation to 3.3% by yearend, below the central bank’s current 3.5% forecast. Overall, caution regarding future rate moves will prevail in the short term as the board opts to accumulate and digest additional information. Although we still expect more easing later in the year (to 1.25% by year-end), we note that the risks tilt toward stable rates given the domestic uncertainties and the central bank’s already-expansionary monetary policy stance. ** Full story here.

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