Morning Note /

Latam Daily: Another busy session ahead in terms of economic data

  • Talking Points: Chile passes mining royalties bill, Moody’s downbeat on Peru

  • Forex: Currency gains to remain capped on Omicron uncertainty

  • Fixed Income: Rising UST yields to pressure Latam sovereign bonds

Lloyd Miller
Lloyd Miller

Head of Developed Markets and Latin America Research

Daron Hendricks
Danny Greeff
Kieran Siney
ETM Analytics
1 December 2021
Published byETM Analytics

Talking Points: Chile passes mining royalties bill, Moody’s downbeat on Peru

Brazil: Traders will have some more key economic data to contend with today. Brazil’s economic calendar is headlined by the November trade report. Consensus expectations suggest that Brazil’s trade balance swung from a surplus of $2.00bn in October to a deficit of -$1.30bn in November. Notwithstanding expectations for a drop in the trade surplus, Brazil's trade fundamentals remain healthy, which should continue offering support to the country's current account and, by extension, the BRL. High global commodity prices alongside the recovery in global demand are supportive of outbound shipments and could see the surplus remain. That said, the omicron variant is weighing on the demand outlook for commodities and, as such, has seen commodities come under some pressure in recent days. Brazil detected two cases of the omicron variant in preliminary testing. Note that Brazil has restricted travel from Southern Africa, where the new variant was first identified.

The session ahead will also see the release of the latest Markit Brazil Manufacturing PMI reading. While the gauge remains buoyed in expansionary territory, it is worth pointing out that Brazil’s Manufacturing PMI reading has trended lower this year, falling from 61.5 at the end of last year to 51.7 in October. The print will provide investors with some key insights into the health of the manufacturing sector. A further decline in the gauge will undoubtedly add to growth concerns.

In a statement released overnight, global ratings agency S&P affirmed Brazil’s BB-/B credit rating. S&P said that Brazil’s economy has recovered faster than expected, but its growth prospects are moderate. The agency added that spending pressures and a high interest burden will likely result in slow fiscal consolidation, with net general government debt trending toward 75% of GDP by 2024..

Mexico: Mexican state oil company Pemex said its board had approved the creation of a new subsidiary to sell petroleum products, gas and petrochemicals domestically. Pemex Chief Financial Officer Alberto Velazquez will head the new subsidiary, and Antonio Lopez, Deputy Director of Financial Risk Management and Insurance, will step into his role, Pemex said. "The objective of the new subsidiary will be to strengthen and increase Pemex's participation in the national market for oil, gas and petrochemical products," declared the company.

Investors will be preoccupied with today’s domestic and offshore data dump. Two releases are likely to headline the local economic calendar today: the central bank economist survey alongside the Quarterly Inflation Report. Both will be instrumental in determining the outlook for inflation and the path for monetary policy going forward. Updated economic projections in the quarterly report are likely to point to higher short-term inflation and recovering but still weak domestic demand. The outlook would, therefore, support the central bank slowly increasing interest rates to anchor inflation expectations until evidence emerges that price pressures are abating.

In other events scheduled today, Mexico central bank governor nominee Victoria Rodriguez Ceja will appear before the Senate Finance Committee.

Colombia: BanRep Chief Leonardo Villar said during his presentation of the central bank's financial stability report that its "macroeconomic and financial indicators coincide in showing that the worst of the crisis is over." He added that, "not only is it over, but we are in a recovery process that has been so fast that the level of activity is already above the pre-pandemic level." Accordingly, the central bank will likely continue to raise interest rates in the months ahead, barring a significant disinflationary shock such as another COVID outbreak.

In other news, the Colombian, Chilean, and Peruvian stock exchanges have approved a merger into a regional holding company that will become Latin America's second-biggest bourse, if approval is given by each of the countries' regulators. The long-planned integration is expected to increase the number of debt issuers, attract international participation, increase regional investment in pension funds and, support the volume of derivatives.

Chile: The mining royalty bill was in focus yesterday as it passed the Chile Senate by a vote of 18 to 16 in favour. The bill which would create the heaviest tax burden amongst copper producing nations will now head back to the committee where members are likely to seek some modifications in order to temper the impact on the sector, it would then head back to the floor to be voted on again. The bill has been caught up in the tidal political swings that we are seeing in Chile with the left looking for more of the spoils, while the right is concerned that extracting too much will hamper investment. Bloomberg reported the following which underscores that thought process - . Companies including BHP Group say the bill as it stands -- with sales tax brackets that increase as metal prices rise -- would derail investments in a nation that accounts for more than a quarter of global copper. That could make the difficult task of meeting rising demand even harder.

Peru: The local data card finally picks up today with the release of the latest CPI numbers. Expectations are that inflation continued to accelerate in November, moving further away from the central bank's target. Both non-core and core inflation are likely to have risen, with food and fuel prices driving up the former, while the latter will remain elevated due to currency depreciation, higher external prices, as well as recovering domestic demand. Given the central bank's current outlook, as explained below, the figures could spur on additional tightening if we see them beat expectations and continue to do so over the next few months.

Meanwhile, Moody's believes that Peru is wasting the current positive external environment, with the country not taking full advantage of the currently elevated copper prices and rebounding global economy that is driving up demand for raw materials. Instead, these positive factors are being used to merely mitigate political uncertainty within the country. The growth the country sees this year, therefore, will not drive up private investment, which is needed for long term economic stability and will cap growth in the coming years. There are also major downside risks still lurking, such as a possible change to the constitution. It is Moody's and our base case that this does not happen, but it cannot be ruled out completely.

The risks to growth also pose notable risks to the stabilization of the government's debt. Moody's estimates that the budget deficit will be around 4% of GDP this year and converge to 3% next year. Public debt is also expected to stabilize around 35%. Although these numbers are not firing any warnings signs just yet, it is difficult to see them heading lower if the economy fails to grow significantly from 2023 onwards. ..

Forex: Currency gains to remain capped on Omicron uncertainty

Brazil: It was another choppy day of trade for FX traders with the USD-BRL swinging between positive and negative territory. The BRL ended the day in the red with the USD-BRL climbing by a further 0.28% yesterday to end the session at 5.6237, its highest level in almost a month. The modest depreciation in the BRL came despite a drop in the USD with the trade-weighted dollar shedding 0.36% on the day. The depreciation in the USD came despite some stronger US data recently and a more hawkish Fed in what appeared to be a further correction in the dollar following the marked rally in recent week. Looking ahead, it is difficult to see the USD losing significantly more ground while the disparity in monetary policies between the US and its major trading partners grows. Furthermore, the discovery of the Omicron variant has the potential to force investors back to safe havens of which the US remains one.

Mexico: The MXN rose modestly versus the US dollar on Tuesday, closing at 21.4513/USD, but still suffered a monthly loss of 2.60%. The MXN could extend its advance towards the 21.000/USD level, which was last seen on November 23, if it manages to sustain its current bullish bias. A broadly weaker greenback could continue to offer some reprieve to the local currency following last week’s route. Once again, the MXN follows external movements in asset prices, and today it will also have to contend with a busy economic calendar.

Speculators increased their bearish positions on the MXN during the week ended Nov 23, despite the central bank maintaining its gradual rate hike cycle to protect the nation from an inflation episode and a sell-off in the local currency. We expect to see speculative positioning become more bearish in the upcoming CFTC report and potentially the weeks ahead.

Colombia: The COP reversed recent losses with a spectacular 1.85% advance on Tuesday, recovering the previous three sessions' losses as it surged towards the 3960.00/$ mark. The currency was already looking very oversold in recent sessions, and an improvement in market risk appetite yesterday was the catalyst needed for its fortunes to turn. Whether it can build on this turnaround remains to be seen, however, especially since market sentiment generally remains cautious given prevailing uncertainty surrounding Omicron and prospective Fed policymaking.

Chile: The USD-CLP touched a new year to date high yesterday of 849.25 before dollar weakness allowed an improvement on the day with the USD-CLP eventually closing at 829.25. The currency now has a new target for peso bears and we would remain buyers on any dips approaching the 50DMA at 810.675.

Peru: The USD-PEN edged higher for a fifth straight session yesterday despite some further weakness for the USD. The pair gapped higher at the open before paring some of the gains to close at 4.0654, its highest since 12 October. Risk assets are showing a bit of a rebound again this morning, which could support the PEN at the open. However, the local political situation will cap any significant gains for the PEN, potentially keeping the pair above the 4.0500 mark for now. Uncertainty over the Omicron variant will also continue to feature, and any news on this will be watched closely as it could move the markets.

Fixed Income: Rising UST yields to pressure Latam sovereign bonds

Brazil: While fiscal risks in Brazil remain elevated, there was some positive news for traders to sink their teeth into yesterday. Data published by the BCB revealed that Brazil recorded its smallest budget deficit in 7 years in October. For context, Brazil’s budget deficit for the 12 months through October narrowed to 4.72% of GDP. This compares to a deficit of 13.7% of GDP a year ago. Yesterday’s reading likely will likely provide lawmakers with enough ammunition to pass the bill to loosen the spending cap law, which will make room for President Bolsonaro’s new social program. As mentioned in yesterday’s note, the Senate is slated to vote this week on the bill that will free up the necessary funds for the new social program ahead of the 2022 presidential election. Given the bill's impact on Brazil’s fiscal trajectory, investors will continue to monitor developments on this front closely. Note that much of the fiscal risk attached to the passing of the precatorios bill is already priced in. Investors fear that if the bill is not passed, the government will result in extreme measures to ensure that it can move ahead with the new social program. This is feared to be the worst-case scenario.

Brazilian bond yields traded lower on Tuesday, taking direction from the better-than-expected fiscal data and sharp drop in international oil prices, which helped ease inflation concerns at the margin. While yields across the curve traded lower yesterday, the most notable move was on the long-end, with the benchmark 10yr yield, for instance, falling 24bps to 11.34%. It is worth noting that Brazil’s 5yr USD credit default swap, a gauge of how much fiscal risk is priced in, also traded lower yesterday, falling to 257bps. That said, although Brazil’s 5yr USD CDS fell yesterday, the broader trend remains to the upside, reflecting all the risk associated with the new social program and risks that the Bolsonaro administration will turn more popularist ahead of next year’s election.

Mexico: Yesterday was a relatively bullish day for Mexican assets. Domestic bonds rallied alongside the MXN, which resulted in a flattening of the yield curve. Yields on the front-end of the curve were little changed, while those on the belly fell by 10bps – 15bps, with the long-end declining slightly more. Pulling back the lens, the sovereign bond curve was little changed through last month. There was a degree of consolidation on both the short and long-end of the curve, while belly reported more trade action with its yields falling by 12bps on average, driving a slight flattening bias in the curve.

Colombia: Colombian bonds continued to attract strong demand on Tuesday, with yields falling across the curve through the session as market sentiment recovered from Friday's Omicron-induced rout. Yields declined relatively more at the front-end of the curve, however, pointing to a correction of over-zealous hawkishness priced into the market in recent weeks. The yields of many longer-dated tenors, meanwhile, have hit strong resistance levels, with further declines potentially on the cards today.

Chile: The bond curve continues to flatten with the front end experiencing paying pressure as investors price for tighter monetary policy in the near term. Bloomberg has the 2023 short end benchmark closing at 5.55% yesterday while the longer dated 2032 bond finished the session at 5.80% leading to the spread between the two closing at 25 bpts. This is off the lows of 22 bpts but the flatteners remain the trade to follow.

Peru: The local yield curve continued to steepen out yesterday, with front-end yields sliding around 2bp on the session. There was some pressure on longer-dated tenors, however, following the surge in UST yields yesterday after Fed Chair Powell struck a fairly hawkish tone at his testimony to Congress. Focus will turn to local inflation dynamics today, however, which could lead to some unwinding of the recent steepening pressure along the curve if we see the CPI numbers come out stronger than expected. This will push up front-end yields once again, while expectations of further policy tightening will drag longer-dated yields lower. The scope for these declines at the back end of the curve is fairly limited, however, given the current political uncertainty within the country