Morning Note /

Latam Daily: Latam currencies remain more attractive than bonds

  • Talking Points: Chilean tax reforms to be ready by June, Colombian election results stand

  • Forex: Latam FX continues to gain as an EM hedge against Ukraine conflict

  • Income: Market volatility to persist with the bias towards flattening curves

Lloyd Miller
Lloyd Miller

Head of Developed Markets and Latin America Research

Danny Greeff
Daron Hendricks
Kieran Siney
ETM Analytics
23 March 2022
Published by

Talking Points: Chilean tax reforms to be ready by June, Colombian election results stand

Brazil: Domestic focus was centred on the Copom’s March 16 rate-setting meeting minutes, where policymakers voted to deliver a 100bps rate hike. Investors were looking for some clarity on the mixed signals provided in the policy statement. The BCB signalled that it plans to end its rate hiking cycle in May as long as commodity prices remain relatively stable. In its forward guidance, policymakers pledged to deliver another 100bps rate hike at its next meeting. Specifically, the BCB said, “the Committee concluded that a further adjustment of 100bps, followed by an additional adjustment at the same pace, is the most appropriate strategy to achieve sufficient monetary tightening and to ensure inflation convergence over the relevant horizon, as well as the anchoring of long-term expectations.”

Looking at the session ahead, the local calendar is relatively sparse, with some second-tier inflation data on tap. We could also see the release of the Feb tax collections data. While the IPC-S could provide some impetus for domestic assets, markets will likely take direction from developments offshore

Mexico: Mexico’s analyst raised this year’s inflation forecast by more than 0.8 percentage points to 5.70% as inflation challenges intensify following Russia’s invasion of Ukraine, which threatens global energy supplies. Next year’s inflation forecast was revised to 4% from 3.80% from the prior forecast. A potentially huge global supply shock that will reduce growth and raises inflation will likely dampen the post-Covid-19 pandemic recovery. It is still too early to predict the invasion's immediate impact on economic development. For the time being, Banamex has maintained its economic growth prediction of 2% for 2022 while slightly lowering the figure for next year to 2.10%. Nonetheless, respondents in the survey expected the next rate policy move to be in March, with a 50bps interest rate hike, raising the key rate to 6.50% (the highest it has been since March 2020).

The national statistics office (INEGI) released its Timely Indicator of Economic Activity (IOAE) yesterday, forecasting 0.3% m/m growth in February after a revised number of 0.5% m/m in January after initially showing a decrease of 0.1% m/m. The latest reading implies the fourth monthly gain, although off a weak economic base. Based on the preliminary figures by INEGI, the most pronounced growth was reported in tertiary sectors (up 0.6% m/m vs a decline of 0.2% m/m in January), while the manufacturing sector fell (decreasing by 0.2% m/m after growing by 1.7% m/m in January).

Colombia: Colombia's electoral authority made a U-turn on a recent announcement that it would request a recount of ballots from this month's congressional elections. It announced yesterday that it would ditch such plans and that the previous results would stand. The decision followed complaints by lawmakers that a recount would open the door to fraud, and questions by legal experts over the constitutional legality of a recount. In any case, this decision will bring into question the validity of the elections, foster distrust in the electoral process, and polarise the nation's populous even more.

Sticking with Colombia's elections, recent polls suggest leftist Senator Gustavo Petro still holds a significant lead over his presidential election rivals, although support for conservative candidate Federico Gutierrez is growing after his strong showing in the primaries. A poll by Centro Nacional de Consultoria showed Petro is leading the race with 32% of vote intentions (previously 27%), compared to Gutierrez's 23% (previously 4%). Similarly, a poll by YanHass suggested Petro would attain 37% of votes (previously 27%), while 19% of respondents intended to vote for Gutierrez (previously 3%). These polls reflected vote intentions for the first round of the elections, meaning it is still unclear how the second-round would play out.

Chile: Finance Minister Mario Marcel told lawmakers that the government will consult with the various groups over tax reform during the month of April, start work with the legislators in May and then be ready to present its formal proposal by June. What is certain is that those on the higher end of the income bracket are going to be expected to contribute more to underpin the governments spending programmes in the coming years. The neo-liberal structure will soon be relegated to the pages of history as the new government has made it clear that the assets of the country are their for the benefit of all.

There are going to be a number of changes to the status quo as the new administration settles in. They will be looking for some early wins which will assure those that voted for them that they picked the right party. The labour minister Jennette Jara has already presented to the members of the Chamber of Deputies stressing that tripartite dialogue will be key to the preparation and discussion of each proposal. A national healthcare system is certainly one of the priorities for the new government as is the new minimum wage proposal which should be presented next month

Peru: Macro-relevant news out of Peru has been a bit thin of late. We have, however, had some interesting developments at state-run oil company Petroperu that are worth mentioning. The company is embroiled in a power struggle with the government at the moment, which has already led to the resignation of its CEO. The dispute comes amid a disagreement between the firm and the country's comptroller over an audit and the company's financial statements for 2021. The deadline of the end of this month will not be met as a result. This has led to downgrades of the firm's credit rating from Fitch and S&P and has seen the state-owned company's bonds tumble in the market. Technically, missing the deadline will mean a default, but negotiations will take place, and creditors will likely agree to a waiver and an extension once a new auditor has been appointed.

Forex: Latam FX continues to gain as an EM hedge against Ukraine conflict

Brazil: BRL bulls remained large and in charge yesterday as the local currency extended its winning streak to a fifth straight session as supply risks linked to the Russia-Ukraine war continued to underpin commodity prices. This comes against the backdrop of expectations for the central bank to lift rates further in the months ahead as inflation pressures persist. For context, the BRL ended the session 0.52% stronger against the USD at 4.9103, its strongest level since June last year.

While the BRL has staged an impressive rally in recent weeks, gaining almost 12% since the start of the year, we still assess the BRL to be significantly undervalued. This implies that there is still room for further appreciation in the BRL. The futures market shares the same view, with the net position on the BRL decisively bullish at the moment. .

Mexico: The MXN’s bullish bias remained entrenched yesterday, extending its winning streak to eight consecutive sessions against the USD. The local currency closed at 20.2803/USD and is on course to revisit its 2022 high of 20.1577/USD. However, the greenback recovered some lost ground from yesterday’s session to cap the MXN’s gains. This week's main catalyst for the MXN will be the central bank rate decision. However, when looking at how the USD-MXN stochastics crossed over in oversold territory and are bottoming out, the bearish bias may well dissipate. Investors, therefore, should be on the lookout for a buy signal in the coming sessions.

Colombia: Playing catch-up after the long weekend in Colombia, the COP led regional currencies higher on Tuesday with a 1.45% advance. The currency found support in higher oil prices at the start of the week, while differentiated risk appetite in EM FX due to the varying impact of the Russia-Ukraine war also continued to support LatAm currencies at large. Technically, the USD-COP bears now have momentum on their side, but may run into support at the year-to-date lows reached earlier this month around 3730.00. A break of this level would, however, open the door for a further decline back to levels last seen in October.

Chile: The local unit had another good day yesterday impressive day yesterday cementing the gains of the day before. The USD-CLP held below the 200DMA at 797.48 to close at 792.85 which does open the door for a test of the 50% retracement level at 782.75 should the current bullish tone be maintained.

Peru: The PEN recovered marginally yesterday from Monday's losses. The currency closed at 3.7776, leaving the 3.8000 level and the 50DMA as key support levels for the local currency. Given the local political backdrop and the fact that Peru's terms of trade has now weakened to near October lows, we could see the PEN come under a bit of pressure over the near term. A break through the aforementioned support levels will open the door back towards the 3.85000 level, which was last seen in mid-February.

Fixed Income: Market volatility to persist with the bias towards flattening curves

Brazil: The aggressive rate hikes in Brazil have seen domestic bonds come under significant pressure over the past year. For context, Brazil’s 2yr bond yield has surged almost 500bps over the past 12 months, while the benchmark 10yr yield has increased by just shy of 280bps. While the broader bias in Brazilian bond yields remains firmly to the upside, there are signs that the degree of bearishness is easing amid talk that the end of the BCB’s tightening cycle is in sight.

That said, volatility in the fixed income market remains elevated as the market digests the mixed signals from the central bank and the massive swings in commodity prices. Intraday swings in the swap market have been larger than usual since the BCB’s Copom meeting last week. The swap market is fully pricing in 100bps rate hike in May and the chance of a 50bps rate hike in June and 25bps in August. That said, we could see some marked changes in the amount of rate hike risk the professional market is pricing in, given the wild swings we are seeing in the commodity market.

Mexico: Mexico’s breakeven rates have continued to rise, now trading at levels last seen during the third quarter of last year. The focus for Mexican policymakers this week will be centred on inflation expectations. The market is pricing in a significant amount of inflation risk over the next two years. For context, Mexico’s 2yr breakeven rate, which we use as a proxy for market inflation expectations, has risen by more than 122bps since the invasion of Ukraine to sit at 5.32%. Moreover, the 2yr breakeven rate sits well above the 5yr and 10yr breakeven rates at 4.86% and 4.64%, respectively. The 2yr breakeven rate is expected to rise in the coming weeks as the commodity shock works its way into the global economy. Further monetary policy normalisation by Banxico will help roll back some of the inflation risk currently being priced in.

Colombia: Consistent with a global bond rout, Colombian bonds traded defensively on Monday with yields rising sharply across the curve. This followed as the market digested an aggressive hawkish shift in Fed forward guidance at the start of the week, which pointed to an accelerated tightening of global financing conditions through the months ahead. Accordingly, moves at the short-end were more pronounced than at the long-end, leading to a notable bear-flattening of the yield curve. Note that the 10v2yr spread is once again testing year-to-date lows reached earlier this month, and could break this level if the flattening bias persists today.

Chile: The pressure to the topside remains in place when looking at the bond curve. Not much has changed in terms of the narrative and thus it is potentially worth pulling back the lens and seeing how far we have come across the various tenors since the start of 2022. The 2023 bond started the year at 5.675% closing yesterday at 7.75% while the longer dated 2030 bond started at 5.65% and is now at 6.40%, this demonstrates the level of curve inversion, we started the year with an almost flat yield curve and now the 10v2 bond spread is quoted at -153 bpts. Granted, this is off the worst levels of -183.5 bpts seen in the middle of March but still points to strong potential recessionary conditions in the next 24 months.

Peru: Peruvian government bonds remained on the defensive yesterday, with yields rising across the board. A significant increase was seen at the front-end of the curve, with investors pricing in a more hawkish BCRP following the Fed's tilt that could see go for a 50bp rate hike at the next meeting. The 2023 tenor is now trading at around 4.22%, its highest since March 2019. This flattening pressure, as we have noted before, is expected to continue over the near term, with inflation risks rising while longer-term growth concerns are mounting not only in Peru but across the globe.