Morning Note /

Chile rejects further AFP withdrawals, dealing Boric a blow

  • Talking Points: Brazilian data still delayed as central bank strike continues

  • Forex: Liquidity conditions set to normalize from today

  • Fixed Income: Inflation pressures expected to keep pressuring bonds

Lloyd Miller
Lloyd Miller

Head of Developed Markets and Latin America Research

Daron Hendricks
Danny Greeff
Kieran Siney
ETM Analytics
19 April 2022
Published byETM Analytics

Talking Points: Brazilian data still delayed as central bank strike continues

Brazil: Domestically, the focus remains on the strike of employees of the central bank and the Economy Ministry, which has delayed customs operations, budget plans and key statistical data, including the BCB’s weekly Focus survey, which went unpublished for a third consecutive week. While reports suggest that Bolsonaro will approve a 5% wage increase for public sector workers, several reports say that workers demand higher wage increases amid double-digit inflation. Bloomberg reported that the 5% public sector wage increase hasn’t been officially announced because the government still needs to find space in the budget. For next year, the government is proposing to set aside BRL 11.7bn in the budget for additional wage increases.

Mexico: President Lopez Obrador's attempt to restore state control of Mexico's electricity sector failed, handing the nationalist leader an unexpected political defeat in his fight against private energy companies. Lawmakers in the lower house of Congress voted 275 in favour and 223 against the bill in a session held late on Easter Sunday, falling well short of the two-thirds majority needed to change the constitution. Its failure provides some relief to the private renewable sector, which has been under attack with regulation changes designed to discourage investment since Obrador took office in late 2018. The president hoped to use the bill to cement his nationalist vision for the energy sector and reverse the privatization of the power industry that began more than two decades ago. The law would have granted the state utility Commission Federal de Electricidad, or CFE, at least 54% of the market, capped private participation and merged independent energy regulators into the federal government. Critics, particularly industry officials, said that the measure favoured fossil fuels and would harm the country's energy future by stifling private investment.

Meanwhile, Obrador submitted a separate bill to nationalise lithium mining following the electricity reform setback, which was fast-tracked by the lower house yesterday. The law was approved with 298 votes in favour and 197 absentees. After the vote, lawmakers resumed discussing several of the bill's provisions, but opposition lawmakers protested by leaving the session. The initiative was discussed not having gone through the usual committee review. It now moves on to the Senate, where the government and its allies hold a majority

Colombia: Economic data out of Colombia around the long weekend generally came out weaker than expected, with February retail sales data reflecting continued year-on-year growth, but a marked month-on-month decline. Manufacturing output stats, meanwhile, showed moderating growth in both year-on-year and month-on-month terms. Ultimately, however, the economy appears to have expanded in February, as reflected in a positive growth rate for the economic activity index. Notwithstanding this expansion, there are growing headwinds in the form of red-hot inflation and tightening financing conditions, which suggest a gradual moderation in economic activity is on the cards for the months ahead.

On the political front, note that leftist presidential candidate Gustave Petro pledged not to expropriate private property should he win the upcoming presidential elections. Petro signed a document saying that he swears under oath not to seize anyone's assets. This follows as Petro's opponents have accused him of planning seizures of private property similar to those carried out in recent years by the government of Venezuela, with Petro looking to put these concerns to rest. Today, the focus will be on conservative presidential candidate Federico Gutierrez, who will be speaking to business leaders about his economic proposals.

Chile: The new President Gabriel Boric is quickly finding that being in the driver's seat is somewhat different from shouting from the sidelines as the opposition. Polls are showing an increasing amount of Chilean’s are souring toward the President and potentially the new constitution as well. A poll published on Sunday by Santiago based pollstart Activa showed that disapproval of the President has risen to 57% which is up more than 10% since he took office in March 2022. Bloomberg reported the following - Another survey by marketing consultancy Cadem showed the president’s disapproval rating rising 9 percentage points over one week to 50%. The data showed that the 36-year-old Boric, who took office on March 11 with lofty plans to create a more egalitarian and environmentally-friendly nation, has seen his popularity collapse more rapidly than his predecessors.

Adding an additional layer of complexity to the new President’s current backdrop is the fact that the lower house of Congress rejected both proposals for a new round of pension fund withdrawals. Boric was in favour of the previous withdrawals and his proposal of an additional withdrawal but only to pay down debt did not pass, which has saved the capital markets from a potential death shot.

Peru: More woes for the Peruvian mining sector as MMG has said that their Las Bambas mine will be unable to continue with copper production as from tomorrow after local communities have continued with their protests against the company for alleged failure to comply with its social investment commitments. MMG has said that it is still committed to working with the community and government to reach an enduring agreement that will benefit all parties. However, with production at Las Bambas stopping, about a fifth of Peru's exports are at risk given the ongoing stoppage at Southern Copper's Cuajone mine.

It will be a quiet week ahead in terms of local data, with nothing scheduled. We will, however, have the heads of major Latam central banks and government officials taking part in IMF and World Bank meetings in Washington through to 24 April. Local protests will also be watched, with unions in the Cusco region holding a general strike to demand a new constitution and protest against inflation. We expect these demonstrations to continue countrywide, albeit sporadically and with less impact than the initial Lima protests had.

Forex: Liquidity conditions set to normalize from today

Brazil: The BRL kicked off the new week on the front foot in what was a day of thin liquidity conditions with a number of key global markets closed on account of national holidays. The BRL, which continues to benefit from elevated commodity prices and its attractive carry appeal, appreciated by 1.03% against the USD to end the session at 4.6531. While the USD-BRL has oscillated in recent sessions, the pair seems to be consolidating in the 4.60-4.80 range. We expect the range-bound trade to persist for now until there is a bout of fresh directional impetus. This would likely come from a material shift in monetary or fiscal policy.

Mexico: The USD-MXN retreated at the start of the week, closing at 19.8280 owing to the rally in commodity prices and Banxico’s hawkish rhetoric. The bears are still eyeing their 2022 low of 19.7274, shrugging off the risk-averse market sentiment. Emerging market currencies are performing unevenly against the USD, with the BRL gaining while the ZAR treads water. Meanwhile, the trade-weighted DXY is struggling to maintain its rally above the 100.00 level, providing a tailwind for the USD-MXN bears. Given this morning's cautious market sentiment, the USD-MXN may suffer some minor whipsaw price action. To the downside, a break below the 19.800 support level will be required if the pair is to test a 10-month low in the coming sessions. On the upside, the 20.000 psychological level will likely act as a strong resistance level.

Colombia: After some volatile trade in the early stages of last week, the COP appears to have consolidated its position below the 3750/$ mark more recently. It will likely continue to test the bounds of its 3700/$-3750/$ range in the coming days, although the market may need a strong catalyst to sustain breaks out of this level in the near term. Further out, much depends on global commodity prices, which have supported the COP in a very USD-bullish environment.

Chile: The USD-CLP closed just below the 100DMA moving average overnight (817.6763) and this marks the first point of minor technical resistance to the topside when looking at the currency pair. There is an element of risk off building in the EU session, with the likes of the ZAR trading around 1% weaker on the day. We would expect the CLP to come under pressure at the open with the prior highs of 823.72, certainly not off the cards.

Peru: The USD-PEN held below the 3.7500 level and the 50DMA resistance at 3.7446 yesterday amid thin trading conditions given the easter break. Trading volumes should normalize today, and thus we could see the pair maintain its bid tone, given what is happening with the USD and rising UST yields. The local backdrop also remains conducive to currency depreciation, with political uncertainty still high, leading to ineffective policies and social disruption.

Fixed Income: Inflation pressures expected to keep pressuring bonds

Brazil: While traders invested in inflation-linked bonds are benefitting handsomely from the global surge in inflation, sovereign debt servicing costs have increased markedly. Soaring inflation is buoying inflation-linked bond yields, while the hawkish shift in monetary policy is driving up vanilla linked bond yields. The combination of which has resulted in a significant increase in debt servicing costs for governments across the globe.

The combination of ongoing supply chain pressures and soaring commodities has pushed global inflation to its highest levels in years. For context, Bloomberg’s World Economy Weighted Inflation Index rose above 8% y/y in April, up from around 3% y/y a year ago. The sharp rise in global inflation has prompted a hawkish shift in monetary policy across the globe, with most major developed market and emerging market central banks raising rates to combat soaring consumer prices.

While central banks have begun to raise interest rates, inflation risks across the globe remain elevated amid ongoing supply shortages, which are underpinning international commodity prices, particularly food and energy prices. Bloomberg’s Commodity Index, which we use as a benchmark for international commodity prices, reached its highest level in a decade this week. With no sign of easing inflation pressures, which is underpinning the hawkish shift in monetary policy across the world, we expect debt servicing costs for governments to remain elevated throughout the remainder of the year.

From an investor's perspective, with inflation pressures expected to remain acute in the near term, investors will continue to benefit from holding a proportionately high position in linker bonds. As mentioned in previous commentary, while we have seen central banks raise interest rates aggressively to ease inflation, the current bout of strong inflation is primarily driven by supply-side price pressures. Therefore, until supply-side price pressures ease, inflation is expected to remain robust in the months ahead.

Mexico: Mexican swap rates rose across the IRS curve at the start of the new week, reflecting growing concerns amongst investors over persistent inflation. Rising crude oil prices, the Ukraine war and further disruptions in global supply chains all pose risk of another bout of inflation, which may become more protracted than initially feared and invite further interest rate hikes. Banxico’s meeting minutes from its most recent meeting have indicated its willingness to tighten monetary policy more aggressively going forward, which would support a paying bias. Mexico is set to publish bi-weekly inflation data for the first half of April and a survey by Banamex this week, which will likely shed some light on Mexico’s monetary policy outlook.

Colombia: The Colombian yield curve has flattened notably in recent sessions, with short-end bonds adding more to their yields than their long-end counterparts. This bear-flattening has occurred alongside a tentative payer bias in the IRS market through much of April, following a sharp decline in swaps rates into the end of March. The market appears to be second-guessing the late-March correction in rate-hike bets, especially since increasingly hawkish Fedspeak has pointed to a more aggressive tightening of global financing conditions recently.

Chile: The swap curve consolidated yesterday with movements kept to a mininium on the first day back from the easter break. 2v10 swap spread held around the -125 bpt mark while the outright levels hardly moved as well. Fixed income traders will be keeping a close eye out on both local and global inflationary pressures which are going to test the BCCH’s resolve over the coming months. The combination of ongoing supply chain pressures and soaring commodities has pushed global inflation to its highest levels in years. For context, Bloomberg’s World Economy Weighted Inflation Index rose above 8% y/y in April, up from around 3% y/y a year ago.

Peru: Local bonds kicked off the new week on the back foot again, keeping the trend of rising yields intact. We now have the 10yr yield touching on the 7.4000% handle and we should see this level breached today given that US yields continue with their surge higher. Dollar bond yields are also expected to keep rising, although we may see some outperformance here compared to local-currency bonds, given that risks to the local currency are building.