Morning Note /

Latam Daily: MXN’s carry attractiveness and valuations may limit appreciation

  • Talking Points: Political noise in Peru to die down, for now

  • Forex: Easing Russia tensions a boon to Latam FX, with CLP breaking through 800

  • Fixed Income: Brazil comes to market with linkers, less hawkish Fed may support Latam bonds

Lloyd Miller
Lloyd Miller

Head of Developed Markets and Latin America Research

Danny Greeff
Kieran Siney
Daron Hendricks
ETM Analytics
17 February 2022
Published byETM Analytics

Talking Points: Political noise in Peru to die down, for now

Brazil: With nothing on the data front, it is all about politics at the moment. The spotlight is on former president Lula and President Lula as they ramp up their respective campaigns ahead of October's much anticipated general election. The latest polling data shows that Lula’s lead over incumbent Bolsonaro has narrowed to a single digit. Polling data released on Wednesday showed that Lula would capture 40% of votes in the first round, down from 42% in the previous month. The data showed that Bolsonaro would get 31% of the votes, up from 28% previously. The survey by PoderData shows that it is set to be a tight race for office as Bolsonaro adopts a more popularist stance in a move aimed at boosting his supportership. Former Judge Sergio Moro is the third favourite candidate, with 9%.

Sticking with politics, President Bolsonaro said that the government is not seeking to evade the spending cap rule. This comes as fears mount that the government will ramp up expenditure ahead of the presidential election later this year. One of the other key topics addressed by President Bolsonaro was the spike in domestic fuel prices and the plans his government has in place to solve the issue that is hitting the pockets of Brazilians hard. Bolsonaro said that fuel prices would not be increased, arguing that his government’s position on the issue is well known. President Bolsonaro noted that if the price of oil decreases and the BRL strengthens, it will make it easier for the government not to increase fuel prices.

Mexico: With global monetary conditions beginning to tighten, emerging markets need to compete for foreign capital, and their economic fundamentals will become increasingly important in that regard. These are captured in ETM Analytics’ Carry Attractiveness Framework, which comprises several barometers that aim to provide a quantitative assessment on whether there is potential value to be found in an emerging market currency from a carry trade perspective. Based on the framework, the MXN ranks below its emerging market peers, namely, the RUB, BRL, ZAR and COP, to name a few. The terms of trade and the current account remain the biggest detractors for the local currency due to rising oil prices. Mexico is quickly becoming a net importer of crude oil as Pemex doesn’t have the oil volumes necessary to meet the country’s fuel consumption as the government’s pushes for energy independence. The currency is currently fairly valued, trading at valuations seen in 2014, but given these detractors and still loose monetary supply conditions, it is unlikely to appreciate going forward.

Colombia: Colombian Finance Minister Jose Manuel Restrepo was on the wires yesterday, confirming government plans to reduce tariffs on almost 200 items as part of efforts to curb red-hot inflation in the country. These tariff cuts will primarily be focused on the agricultural sector, since high food prices have been a key driver of current inflationary pressures. Restrepo, who also sits on the BanRep’s board, also said that the central bank needs to continue with its tightening cycle to control price pressures, but this needs to be weighed against the impact it will have on Colombia’s economic growth. Finally, Restrepo tried to ease investor fears over the upcoming presidential elections by saying they should not worry if the next government is left or right-leaning, as the president will preserve both the nation’s institutions and democracy.

Chile: The BCCH announced that it would be joining the Latin American Reserve Fund. The FLAR Assembly who comprise of Bolivia, Colombia, Costa Rica, Ecuador, Paraguay, Peru, Uruguay and Venezuela support the balance of payments of member countries. The move by the BCCH is not unexpected given that the bank would want to strengthen its access to liquidity and lines in FX should the need arise. This comes ahead of the termination of the flexible credit line with the IMF in May.

In other local news, the Chilean state-owned mining giant Codelco stated that it would begin exploration for lithium in the Salar de Maricunga next month. Lithium is key to the world moving away from carbon based energy and thus there is of massive strategic importance to Chile from both a tax as well as hard currency earnings standpoint. Reuters reported the following - Codelco said drilling will begin at the end of March and last about 10 months. Maricunga has some high-grade lithium deposits, though it is less than 5% of the size of Chile's vast Salar de Atacama, one of the world's main lithium regions. "Depending on the results of the campaign, specifically the concentrations of lithium dissolved in the brines of mining properties, the company will define whether it is environmentally and economically viable to continue with the development," Codelco said in a statement.

Peru: President Castillo seems to be recovering some of his support from the more centrist parties in Peru, with the Podemos party speaking to the president recently and developing a dialogue in an effort to avoid any further confrontations between the executive and Congress. Accion Popular, another centrist party, has also proposed a dialogue with PM Torres to help the country emerge from its current political crisis. PM Torres has responded to this by apologizing to lawmakers for how he has expressed himself during conflicts with lawmakers. With this, Torres believes that the tension between the executive branch and Congress has been overcome now.

Torres has also asked that Congress hold a vote of confidence on the new Cabinet on 8 March, according to Congress President Alva. Alva did, however, note that she wants the Peru Libre Party to withdraw its constitutional complaint against several lawmakers. This will likely happen in a concession to get the new Cabinet approved at the 8 March vote. Therefore, it seems as if the political noise in the country may die down, for now.

Forex: Easing Russia tensions a boon to Latam FX, with CLP breaking through 800

Brazil: It was another session of solid gains for the BRL on Wednesday on strong commodity prices and a subdued dollar. The BRL extended its winning streak to a fourth consecutive session, with the local unit gaining 0.71% against the USD to end the day at 5.1293, its strongest level since July last year. Looking ahead, given the shift in factors supporting a stronger BRL, we remain bullish on the local currency. That’s said, there are some significant levels of support that will test the downside momentum in the USD-BRL in the sessions ahead. Should the pair break below the 5.10 mark, we expect BRL bulls to set their sights on the 5.00 big figure.

Mexico: The USD-MXN retreated for the fourth straight session yesterday, breaking below the key 200DMA support at 20.3418 for the first time in five months before finishing at a one-month low of 20.3229. The bearish bias was supported by a broadly weaker greenback as US Treasury yields fell in response to the dovish FOMC meeting minutes. Ahead of the US Open, the USD-MXN has continued to slide, dropping to levels last seen in November last year at 20.2500. However, renewed geopolitical concerns may cap the bearish bias as havens are favoured. Though there is no definitive news to trade on, and investors continue to hope that geopolitical tensions will eventually dissipate, caution will dominate markets. Later in the day, the US economic docket will feature the weekly initial jobless claims and housing starts data, but the market action is likely to continue to be driven by geopolitical headlines.

Colombia: The COP bucked a trend of regional currency strength yesterday, depreciating for a fourth consecutive session. The move was small, however, with the currency sticking to its broader range between its 50-session and 100-session moving averages. Note that the COP has bounced around in this range for most of this year, and will likely continue to do so until a strong catalyst arises to provide fresh directional impetus. Given the lack of market-movers on the cards for today, however, such a catalyst is unlikely to emerge today.

Chile: The USD-CLP has closed below the 800 handle taking advantage of dollar weakness to once again test the bids around the big figure. The question for the CLP bulls is now whether or not they can sustainably break below the Jan prior low at 793, which if broken does suggest a retrace to 786.78.

Peru: The USD-PEN gave up all the recent sessions' gains yesterday, slumping back down to below 3.7500 by the close yesterday. The PEN tracked gains for the CLP and was further supported by the easing of political tensions locally. The pair is now near its recent low of 3.7162, with no major support levels on offer below that until we get to the 3.6600 area, which was last seen in May 2021.

Fixed Income: Brazil comes to market with linkers, less hawkish Fed may support Latam bonds

Brazil: The inversion in Brazil’s swap curve worsened yesterday as shorter-dated yields nudged higher. In contrast, yields on the belly and long-end fell on the back of improved risk sentiment and encouraging comments from Bolsonaro regarding the government’s commitment to the spending cap rule. For context, the 10v2 spread compressed by 10bps to close the session at -62bps, its lowest level this year.

In the primary market, National Treasury plans to sell Selic-linked LTN notes maturing in 2023, 2024 and 2025, as well as inflation-linked NTN-B bonds maturing in 2029 and 2033. As always, the volume of bonds to be auctioned will be announced at 10:30 am local time. Given the dearth of domestic data, the secondary bond market could take direction from the outcome of the weekly bond auction..

Mexico: MXN bond yields fell modestly yesterday as investors welcomed the less hawkish tone of the FOMC meeting. The MXN's strong performance aided the local bond market as US Treasury yields fell. Looking to the session ahead, global bond yields have fallen as investors sought safety in government bonds as Ukraine tensions worsen. Meanwhile, investors are digesting the latest FOMC minutes, with the Fed indicating that the Fed funds rate will begin rising again next month and that rates would rise at a moderate pace implying that a 50bp hike may be too much, too soon. The fact that the benchmark US 10-year Treasury yield fell to 2% following the FOMC minutes after briefly trading to a 30-month high of 2.0645% in the previous session, suggests MXN bonds may strengthen today.

Colombia: The Colombian yield curve continued to bull-flatten on Wednesday, with bonds at the long-end of the curve shedding as much as 12bps through the session, while those at the short-end were relatively flat. The long-end was being driven by a range of factors, such as falling US Treasury yields, moderating geopolitical fears concerning the Russia-NATO standoff, and, potentially, easing political fears ahead of the upcoming presidential and congressional elections. Meanwhile, the short-end is pricing an aggressive local rate-hike trajectory for the months ahead, and will likely remain buoyed in the weeks ahead.

Chile: Swap curve inversion has stalled for now with 2v10 quoted at -127 bpts off the lows of -129 bpts recorded a day earlier. This came as investors pared back paying interest, the 2y closed at 7.175% after printing levels north of 7.30% the day before. We remind readers that we are in uncharted territory and although we have consolidated the move, it does not mean that the curve cannot invert further from here.

Peru: Local government bonds rebounded yesterday as easing political and geopolitical tensions, as well as some less hawkish than expected FOMC minutes provided a bit of support to the market. The curve bull flattened as a result, although movements were kept fairly marginal on the day. Three has been some talk that international liquidity is returning to the local market, which could see moves over the coming sessions look a bit more exaggerated than those we have seen over the last few weeks.