Morning Note /

Latam Daily: Local politics heating up again

  • Talking Points: Peru impeachment debate to go forward, Colombian data on tap

  • Forex: Speculators remain bullish on Latam FX

  • Fixed Income: Higher UST yields pushing Latam bond yield north

Lloyd Miller
Lloyd Miller

Head of Developed Markets and Latin America Research

Danny Greeff
Daron Hendricks
Kieran Siney
ETM Analytics
15 March 2022
Published byETM Analytics

Talking Points: Peru impeachment debate to go forward, Colombian data on tap

Brazil: Economists polled in the central bank’s Focus survey raised both their interest rate and inflation forecasts for 2022 and 2023 after state-controlled energy giant Petrobras increased domestic fuel prices. Economists now expect the benchmark interest rate to rise to 12.75% by the end of the year, up 50bps from the previous forecast. The 2022 year-end inflation forecast was upwardly revised to 6.45% from 5.65% previously. In terms of next year, economists now see the Selic rate ending 2023 at 8.75% and inflation at 3.70%. Both the 2022 and 2023 year-end forecasts are above the central bank’s inflation targets of 3.50% and 3.25%, respectively.

As mentioned in yesterday’s note, it is widely expected that Copom will deliver another 100bps rate hike tomorrow evening. Economists now expect the central bank to deliver a 75bps rate hike in May as the central bank battles persistent supply-side cost pressures, which have driven up domestic fuel and food prices. That said, it is worth noting that Congress has passed a tax reduction for fuels aimed at softening the fuel price increase for consumers.

Mexico: Mexico's Senate majority leader, Ricardo Monreal, is working on legislation to compel banks to provide low-interest loans to small and medium-sized enterprises to revive the country's stalled economic recovery. According to Monreal, the bill will assist the many enterprises severely impacted by the pandemic. He intends to seek approval from the central bank, banking associations, and the Banking Commission before pushing ahead with the bill. Bank lending in Mexico as a percentage of GDP is typically one of the lowest among the region’s larger economies, and with inflation close to a 20-year high, the purchasing power of Mexican families has been reduced significantly. According to Bloomberg data, total performing consumer loans by the country’s banks are still about 4% below their pre-pandemic peak

Colombia: The Colombian data card heats up today with the release of retail sales stats for January, which are expected to reflect a 19.1% y/y growth rate at the start of the year. Risks are tilted to the downside, however, with recent consumer confidence gauges and other leading indicators suggesting Colombia's economic momentum may moderate through 2022. In addition to the retail sales print, there will also be January manufacturing and industrial production numbers released today. These data prints are also expected to reflect relatively strong, but slowing economic momentum in Colombia at the start of the year. Domestic demand is still driving economic activity, while higher commodity prices will likely also support the industrial production print. The data will be interesting given the precarious position the central bank finds itself in, as it looks to combat mounting price pressures without denting Colombia's slowing economic expansion.

Chile: Fitch has released a report which states that growth for Chile could slow to 2.8% in 2022 and to 2% in 2023 with significant changes in terms of policy from the new administration having a potential impact on growth. One of the points the report highlighted is basically the sum of all the potential challenges. Bloomberg reports - Perceptions that the assembly wants to advance social rights at the expense of property rights could weigh on investment and the enumeration of social rights could add to spending pressures. Fitch also highlighted that the country’s mining sector could benefit from the war in the Ukraine which will underpin metal prices and boosted government coffers.

Peru: Congress approved the start of impeachment proceedings against President Castillo yesterday. The motion was approved by 76 votes, not far off the 87 needed to oust him when the final vote takes place. Castillo will now defend himself on 28 March. The numbers are quite close, and thus the upcoming two weeks will likely be filled with political wrangling. Castillo will want to maintain the support of those who back him, while his detractors will push for more votes, using the investigation into him as ammunition. At the moment, the three leftist parties have enough votes to block the motion, but there is time for some of them to be swayed. President Castillo will address the nation today at a speech scheduled for 5pm local time.

Meanwhile, the local data calendar heats up today with the latest releases for economic activity and unemployment. Expectations are that economic activity accelerated in January compared to the December numbers, both on a y/y and m/m basis. Data that has been released already has shown that mining rebounded in January, rising by over 4.5% after slumping in December owing to the disruptions at key mines. Detracting from this will be the slower pace of growth for construction, and vehicle sales, suggesting that consumption and investment growth are starting to fade now amid a withdrawal of monetary and fiscal stimulus. Overall, however, the figures will mostly be in line with the BCRP's assumptions for growth going forward, suggesting they shouldn't have too much of an impact of rates pricing

Forex: Speculators remain bullish on Latam FX

Brazil: The BRL received another blow on Monday even as economists increased their rate hike expectations on the back of persistent inflation pressures. The BRL was the second worst-performing currency on the session, losing -0.87% against the USD to end the day at 5.1195, according to Bloomberg data. Although the BRL has come under pressure over the past two sessions, the broader bias in the currency remains decisively bullish, with the BRL still the best performing emerging market currency in 2022.

The latest CFTC data reveals that options traders are still very bullish on the BRL. Brazilian assets have been on a bit of a tear this year so far, unwinding some sharp undervaluations in the process. The BCB is still looking very hawkish despite the massive rate hikes that we have seen from it so far, further adding to the currency’s carry trade appeal, which should cement its net long position and lead to some further gains in the spot market, external conditions notwithstanding..

Mexico: The USD-MXN drifted lower yesterday, extending its losses to two straight days after closing at 20.9132. The USD appears to have run into some headwinds and may struggle to make further headway in an environment that could still see overall levels of risk aversion subside. If the greenback continues to fall, the USD-MXN bears may target the 100DMA support at 20.7097, followed by the 50DMA at 20.5756. Meanwhile, the one-month USD-MXN implied volatility is extending a 6-day decline to 10.90% this morning, the lowest level since February 25, indicating a reduction in risk aversion since the Ukraine conflict erupted.

Colombia: The COP shrugged off falling oil prices at the start of the week, bucking regional currency weakness with a 0.55% advance on Monday. This move reflected a market repricing the risk of a Gustavo Petro presidential election victory after right-wing candidate Federico Gutierrez's strong showing in the primaries over the weekend. Looking ahead, the COP may trade with increased volatility in the weeks leading into the May elections, with the balance of risks between a left-wing and right-wing election victory looking more evenly balanced than before.

Chile: The USD-CLP finished the session on the front foot yesterday driven mostly by a retrace in the copper price. The pair finished the session at 813.13 which is still within the well-worn range, and we are not yet convinced that we will see a break out as we have seen copper recover and the broader investment community sidelined as they watch the crisis in the Ukraine unfold and wait for guidance from the Fed tomorrow.

Peru: The PEN weakened yesterday alongside its Latam peers, although the vote to go ahead in debating Castillo's impeachment will have added some pressure to the local unit. The USD-PEN closed at 3.7327, its highest close since 8 March and keeping it above the 3.7000 support level. This will remain the line in the sand to the downside for now, with the markets likely to become a bit jittery ahead of tomorrow's FOMC meeting. Any dips in the session ahead, therefore, will likely be scooped up quickly.

Fixed Income: Higher UST yields pushing Latam bond yield north

Brazil: The bearish bias on the front-end of the swap curve intensified yesterday after economists polled in the BCB’s Focus survey raised their inflation and interest rate forecasts for both 2022 and 2023 on the back of supply-side cost pressures related to the Ukraine crisis. The shorter-dated 2yr swap rate closed Monday’s session at a fresh year-to-date high of 13.09%, rising 22bps on the session. Movements on the long end of the curve were modest in comparison with the benchmark 10yr swap rate, climbing 8bps to 12.43%, according to Bloomberg data. Yesterday’s movements saw the inversion in the curve deepen with the 10v2 spread closing the session at -66bps.

Interestingly, the flattening in the curve came despite a further retreat in international oil prices. Interest rates hawks are watching developments in the commodity market closely, given its implications on inflation the world over. Inflation expectations have surged in recent weeks as international commodity prices legged higher on the back of supply fears related to the war between Russia and Ukraine. Although inflation expectations remain heightened, it is worth noting that there has been a marked retreat in oil prices in recent days, helping to ease inflation fears.

Mexico: MXN bond yields kicked higher along the curve at the start of the week, owing to an extended rally in US Treasury yields, indicating how well anticipated a hawkish Fed stance is ahead of Wednesday's expected 25bps interest rate increase. Due to the commodity shock driven by Russia's attack on Ukraine, traders have begun to price in a more aggressive path for Fed hikes to quell inflation. Before the war, inflation was already high, and sanctions against Russia exacerbate global economic issues and created a risky environment for stock and bond markets. Investors are likely to tread cautiously in the lead up to this week's pivotal Fed meeting, offering further insight into the central bank’s thinking. The Fed will release its dot plot showing where officials expect interest rates to head over the next few years. These forecasts will be essential for Banxico as it grapples with surging inflation and sluggish economic growth.

Colombia: Colombian bonds started the new week off on the defensive, as investors braced for increased political uncertainty leading into the May elections after this weekend's primaries. Simultaneously, the market also priced in growing inflationary concerns, which led to an extension of the recent bear-flattening trend on account of short-end underperformance. Notwithstanding the political uncertainty investors are having to deal with at the moment, inflationary concerns remain central to the market, reflected in the narrowing 10v2 yield spread and rising short-end IRS rates.

Chile: No respite for the bond market as sellers took the curve higher from a yield perspective once more at the start of the week. The selling was most acute in the belly of the curve according to Bloomberg data. The 2030 bond finished the session at 6.19% after closing the Friday session at 5.925%. Ahead of the open, investors will look at the broader retrace in commodity prices, lower oil prices will certainly stall the pressure for the bond and swap curve to invert further and we could in fact see a mild retrace from current levels as the session unfolds..

Peru: Local bonds kicked off the new week largely on the defensive yesterday with yields rising across the curve, barring the very front end. The curve steepened out as political risks are now back at the fore following the impeachment vote that saw more support than what some had expected. Global yields also continued to rise, which added some upside pressure to the local yield curve, with inflation and central bank tightening still the buzzwords within global markets. The external environment will likely remain negative for local bonds over the near term, but as we have noted before, yields in Latam are looking very attractive in general, and Peru's strong credit rating makes it stand out. Therefore, once the dust settles on the war and the Fed is into its hiking cycle, Peru's markets could look attractive