Morning Note /

Latam Daily: Busy day ahead for Brazil with inflation figures eyed

  • Peru PM backtracks on mine closures, Brazil data in focus

  • Forex: Low liquidity to be a feature today

  • Fixed Income: Foreign ownership of Brazil debt likely to decline

Lloyd Miller
Lloyd Miller

Head of Developed Markets and Latin America Research

Daron Hendricks
Danny Greeff
ETM Analytics
25 November 2021
Published by

Talking Points: Peru PM backtracks on mine closures, Brazil data in focus

Brazil: Today brings with it a sizable amount of data on the local front which will give the investment community a fundamental handle to trade off in the absence of much international influences given that the US is out for the Thanksgiving holidays.

The FIPE CPI- Weekly reading has already been posted at the time of writing coming in at 0.90% versus a market consensus of 0.95% and a previous reading of 0.98%.

This sets the stage for the release of the IBGE Inflation reading with the m/m print expecting to show moderation with consensus pegged at 1.13% versus 1.20% previously. In terms of the individual components, the expectation is that we see food and electricity prices coming off but fuel prices remain very much topside focused. A general pullback would however be welcomed by the policymakers who have acted aggressively to contain the inflation monster which has plagued Brazil for much of 2021.

Following on later in the session we have the Current Account Balance for October which is expected to be substantially worse than September's reading with the market pencilling in -$4862m, versus a previous reading of $1699m..

Mexico: Mexican President Lopez Obrador unnerved financial markets on Wednesday by nominating Victoria Rodriguez, a Deputy Finance Minister, to head the country’s central bank. The low profile of Rodriguez has raised concerns about whether she is qualified for the position. If her nomination is ratified, she will be the first elected woman to lead the central bank. The move has raised doubts over the central bank's rate-tightening cycle as it battles to keep inflation in check. The decision has also brought Banxico's independence into question, despite Obrador's promising there would be no government meddling or interference in the bank's decisions. In a brief interview with local media yesterday, Rodriguez said she was committed to combating inflation and would not touch Mexico's international reserves. According to analysts, Rodriguez may shift the balance of forces more dovish, although for now, Banxico is likely to continue hiking rates given the extraordinary inflationary pressures.

It is an action-packed day ahead for the local market, with several top-tier economic releases scheduled for release. Investors will focus on the final Q3 GDP reading and the central bank’s monetary policy meeting minutes (see interest rate outlook below). Concerning the former, there are expectations that the final economic reading for Q3 will be revised lower to 4.5% y/y from a preliminary estimate of 4.6% y/y. This would also be consistent with a larger q/q drop than the 0.2% in the preliminary figure. Increasing infections and lockdowns in July and August would account for most of the decline. Recent data has suggested that the economic recovery extended through Q4..

Colombia: Health Minister Fernando Ruiz said on Wednesday that Colombia would seek to vaccinate more than 80% of its population against COVID-19 – an increase from its previous target of 70% – as the government looks to cut the risk posed by future waves of infections. The country of around 50 million people launched its vaccine drive in February and has so far administered 23.7 million complete vaccinations. "It's clear now that more than 70% coverage is needed and that the target should be to vaccinate 80%, or perhaps 85% of the population, to really reduce the risk of new peaks," Ruiz told Reuters in an interview. Whether uptake will increase remains to be seen, with COVID fatigue setting in across the globe while more questions arise over the arbitrariness of vaccination targets and some of the COVID regulations.

As of yesterday, the seven-day moving average of daily new cases in Colombia was 2,387, with this still extremely low when compared to the peak of the previous wave (30,865). A tentative increase in new cases, however, suggests the next wave of infections might be drawing nearer, although it is still too early to say for sure.

Chile: The political landscape will be an interesting one over the next few weeks as the presidential contenders, namely Jose Antonio Kast and Gabriel Boric, canvass support from those lower down the support chain ahead of the run-off scheduled for the 19th December 2021. Gabriel Boric’s hopes of becoming Chile’s next president received a boost with Senator Yasna Provoste, who came out fifth in Sunday’s first round, throwing her support behind him. This was expected given how close Boric and Provoste are on an ideological level. What is going to be interesting to see is who Kast manages to get to rally behind him as coalitions are going to be the new buzzword.

Peru: Prime Minister Vasquez said yesterday that the government will honour the mining agreements it has, stating that there will be no unilateral shutdowns of any mines. “We once again ratify that there are no unilateral shutdowns. What we are going to do is follow the closure plans that these companies have to control that they are done within the established deadlines," Vasquez said. She also confirmed that companies can continue to ask for authorizations but that they have to go through a consultation process that includes community participation.

To give a sense of how well this news was received, Hochschild Mining Operations saw its stock price rebound by around 24% yesterday after it collapsed in recent days amid fears its mines would be shut. The company welcomed the announcements and said that it will continue with its operations under the current legal framework.

Communities from the Ayacucho region, however, have vowed to restart protests if the four mines are not shut down. The strike was initially halted on 29 October, but could resume and carry on indefinitely. This will be followed closely over the near term as how the government responds and deals with all sides here will set a precedent going forward. As we noted yesterday, it's a balancing act as Castillo will want to appease the communities, but shutting down mines will impact government revenues and threaten economic growth.

Forex: Low liquidity to be a feature today

Brazil: The USD-BRL continues to pivot along the 5.6000 level for now, with the pair edging higher yesterday as the USD received some further support from strong economic data releases out of the States. As we noted yesterday, however, the broader bullish trend for the pair remains generally intact, with the next major resistance level to keep an eye on the 5.7500 mark. The stochastics are still pointing higher and have now reached a strong buying region between the 60 and 70 levels.

Mexico: The MXN led the emerging market currency slide yesterday, falling to a one-year low of 21.6149/USD before pairing an initial loss to close at 21.4251/USD. The local currency tumbled following the leadership shake-up of the central bank as inflation continued to rise early on in November. This was made worse by a bid tone on the USD. Now that the pair has depreciated below its year-to-date low, it opens the door for a test of the 22.000-handle, last seen in October 2020. There is still further risk of investors increasing their bearish bets on the local currency amid Rodriguez’s appointment, which may ironically force the central bank to hike rates more aggressively if the currency slide is sustained. The one-month MXN implied volatility climbed for the fifth day to 14.50% - the highest since April. For context, the MXN ranks sixth out of twenty-two emerging market currencies tracked by Bloomberg.

Colombia: The COP-bears remained in charge on Wednesday, with the currency depreciating 0.65% through the session to close at its weakest since early-August. This was primarily a function of USD strength rather than COP weakness, however, with the greenback's bull run extending on the back of strong US economic data and bets for more aggressive Fed monetary tightening in the months ahead. Looking ahead, the USD may take a breather amid thinner liquidity conditions into the weekend, with the US celebrating Thanksgiving today.

Chile: The USD-CLP opened at 812 yesterday and closed higher at 814.77. As mentioned yesterday, the exuberance following the Kast victory in the first stage of the Presidential election seems to be fading somewhat and we are now anchored above the 50DMA at 806.82 and we expect that investors would prefer to add to longs on levels approaching this support level.

Peru: The USD-PEN gapped higher at the open yesterday as the dollar kept surging following some strong US data releases ahead of the Thanksgiving holiday period. The pair is still being contained by the 100DMA, which is currently at 4.0355. This resistance level should hold up as liquidity levels will be low through the rest of the week. The 4.000 handle, meanwhile, remains the support level to watch as it has held up since the end of October.

Fixed Income: Foreign ownership of Brazil debt likely to decline

Brazil: According to the Treasury, federal public debt in Brazil maturing over the next 12 months totals around 1.14trn, while the total comes in at around 5.373trn. These numbers are for September. This was down from 5.443trn in August as domestic debt fell 1.5% m/m and foreign debt climbed by 3.77%. The share of foreign debt is minimal at only 267.41bn. Foreign ownership of Brazil's debt, meanwhile, increased to 10.45% from 10.10%, although we should see this decline when the October and November figures are released, given the sell-off seen for bonds through October. Although a lower share of foreign-owned debt speaks to the limited attractiveness of the country's bonds, it does help shield the local markets to some degree from external market shocks.

For the day ahead, focus will be on the inflation data, which could generate some volatility within the market, especially as liquidity levels will be impacted by the US holiday.

Mexico: Mexican bonds weakened yesterday following the nomination of the new central bank governor, but the initial reaction was unwound, with investors likely waiting to see if the nominee will be ratified. Sustained policy uncertainty risks seeing the yield curve steepening in the coming sessions, particularly against a weak economic growth backdrop. Meanwhile, the inflation data resulted in an uptick in front-end bond yields yesterday as it continues to highlight the need for tighter policy settings. Swaps were paid higher yesterday, with the market pricing in 25bps worth of rate hikes for the remainder of the year and around 170bps of tightening in the year ahead.

Colombia: The Colombian yield curve continued to bear-steepen on Wednesday, as bonds at the long-end of the curve came under more selling pressure than their long-end counterparts. This reflected concerns that more aggressive Fed monetary normalization could be on the cards for the months ahead, with the consequent tightening of financing conditions expected to increase investor cautiousness towards EMs in the months ahead, with Colombia's fiscal weakness likely to attract more scrutiny. Looking ahead, liquidity conditions are set to be thinner than usual into the weekend due to the American Thanksgiving holiday, with some consolidation likely.

Chile: The bond market has settled down further post the strong receiving interest earlier in the week with paying interest coming through yesterday. The 2023 closed the day yesterday at 5.49% after closing at 5.45% on Tuesday while the longer-dated 2030 finished at 5.65% after finishing the Tuesday session at 5.63%. Looking at the day ahead we expect trade to be rather quiet, we may see additional payers coming through as the market gives back some of the gains seen earlier but for the most part expect very low liquidity as the US is out for a long weekend.

Peru: Another day and another tick higher for yields across the local curve. Movements were fairly contained, however, with foreign activity likely low due to the Thanksgiving holiday in the US, which kicks off today. We expect this to remain the theme through the rest of the week, especially as the next local catalyst will be next week's CPI data. The risk to this view, as always, is from the political front, given how sensitive the markets have been to any developments there in recent months.