Talking Points: Castillo survives second impeachment, Chile to hike rates
Brazil: While financial markets are fixated on monetary policy at the moment, given the global surge in inflation on the back of persistent supply chain disruptions and supply concerns linked to the war in Ukraine, Brazilian traders shifted their focus to fiscal dynamics on Monday following the weaker than expected tax revenue data. Although federal tax revenue came in below expectations, at $148.66bn, the February reading still marked a significant increase from levels seen a year ago and was the strongest February reading on record. Note that the January and December readings were also monthly records. The record tax collections have been a function of improved royalty revenues on the back of soaring oil prices and larger revenues from fixed-income investments. Although the weaker than expected print may have raised some eyebrows, it is not something to be overly concerned about unless this trend is sustained in the months ahead.
Keenly watched data releases by the central bank are being delayed due to a protest by central bank workers for higher salaries. Bloomberg reported that central bank workers are unhappy with a pledge by President Bolsonaro to increase wages for only some public servants such as police officers. The release of the weekly Focus survey was delayed by an hour and a half yesterday. Once again, economists raised their inflation expectations for this year and next, with year-end headline inflation for 2022 and 2023 now forecast at 6.89% and 3.80%, respectively. Although inflation forecasts were revised higher, economists decided to leave their year-end Selic forecasts for both years unchanged at 13.00% and 9.00%, respectively.
Mexico: Mexico's trade flows improved significantly in February, with the National Statistics Institute reporting a $1.29bn trade surplus, which exceeded market expectations. This compared with a hefty $6.29bn deficit in January and brought the trade balance for the first two months of 2022 to a deficit of $4.99bn. Exports increased 27.8% y/y in February, the eleventh consecutive increase and the largest since June 2021. Exports of manufactured goods, which accounted for about 88% of the total, were up 27.7% at $40.64bn, including a 31.8% rise in vehicles and auto part shipments. Petroleum exports increased 53.5% to $2.79bn on higher crude-oil prices, while petroleum imports, including gasoline, diesel, and natural gas, rose 47.6% to $4.32bn. The $1.53bn deficit in petroleum trade was offset by a $2.82bn surplus in nonpetroleum goods.
In contrast, imports increased 34.2% y/y, the twelfth consecutive increase and the highest since last August. The easing of global crude oil prices but improving domestic demand keeps imports supported. With these dynamics set to persist in the near term, risks exist for the surplus to narrow or swing back into a deficit. Such an outlook does not bode well for the MXN, which is being weighed down by a weak current account.
Colombia: The IMF believes that Colombia's economy can keep its strong momentum from 2021 going through this year, with the Fund predicting that Colombia's economy will expand by 5.75% this year. This is above potential and will be driven by robust household consumption and a continued recovery for exports and investments, according to the IMF. It was, however, noted that the risks to this view are tilted to the downside, given rising international food prices and disruptions to global supply chains. In terms of inflation, the IMF expects to see CPI at around 6.75% for the year, well above the Banrep target range of 2% to 4%. This robust growth outlook and elevated inflation suggest that we should see the central bank continue on its path of policy tightening. Another positive, however, is that the current account deficit is expected to narrow to around 3.3% of GDP, down from a negative gap of 5.7% seen last year.
Chile: Today sees the first sitting of the new administration under governor Rosanna Costa. As mentioned yesterday, it is worth noting that at the January meeting, policy members debated whether or not to raise rates by 125, 150 or 175 bpts before settling on the 150 bpts. Consensus for the meeting today is for a 175 bpt hike which will take the overnight rate to 7.25% from 5.50%. The risk according to the trading desks is for an outsized hike of 200 bpts, while some are suggesting that a more moderate approach of 150 bpts is on the cards given the impact of an outsized rate hike on an economy which is already losing momentum.
Tomorrow will see the BCCH releasing its quarterly inflation report which will give insight into the bank’s thinking on growth and inflation as well as the broader direction of monetary policy going forward. What will be important to dissect is how the bank has changed its growth and inflation projections as a result of the Ukrainian/Russian war and the dislocations in commodity markets
Peru: Peru lawmakers have voted against impeaching President Castillo, with 55 voting in favour of the motion while 54 voted against it. It was a marathon debate that lasted eight hours, but Castillo eventually survived this second attempt to remove him from office. Castillo is not out of the woods just yet, however, as some opposition lawmakers have started a process that accuses the president of treason owing to his statements regarding giving Bolivia access to the Pacific Ocean. If the process is successful, Castillo will be suspended from his duties in May. There is also the investigation into him for alleged influence trafficking and collusion. Therefore, the Peruvian political landscape will remain highly volatile even though he has survived this most recent impeachment attempt.
Forex: PEN relief rally may be minor given little risk priced in
Brazil: While the broader bullish trend in the BRL remains intact, the local currency kicked off the week on the back foot as renewed lockdowns in China spurred concerns about Chinese demand for commodities. Shanghai, China’s financial hub, imposed a two-stage lockdown to contain a resurgence in Covid infections.
The BRL closed the session 0.48% weaker against the USD at 4.7657, according to Bloomberg data. The BRL was not alone, with most emerging market currencies closing Monday’s session in the red against the USD. Notwithstanding yesterday’s losses, the BRL is still the best performing emerging market currency in 2022, gaining 17.00% against the USD since the start of the year.
Although the BRL came under some selling pressure yesterday and local traders have scaled up their hedges on the currency, the futures market remains decisively bullish on the currency. The latest CFTC data showed that the sizeable net long position on the BRL was little changed in the week ending 22 March. For context, the net long position sits at $840mn.
Mexico: The USD-MXN perked up yesterday, rebounding from the 20.00 support level to probe the 20.200 mark, snapping an eleven-day losing streak as the USD posted its biggest daily gain in three weeks. With overall levels of risk aversion remaining contained as investors remained optimistic about further progress in Russia-Ukraine peace talks. This has resulted in the trade weighted DXY giving away part of the recent strong advance and returning to the 99.00 handle. As a result, the USD-MXN is trading on the defensive. That said, this may be short-lived given the potential for the re-emergence of USD buying interest in a risk averse trading environment. The 200DMA at 20.4175 will be the first resistance level for the USD-MXN bulls.
Investors stepped up their net short positions on the Mexican peso in back-to back weeks after going long the currency for six straight weeks prior. This is despite the MXN extending a record rally, strengthened by the central bank's rate hike last week, which fell out of the CFTC data. We, therefore, could see the upcoming report see investors trim their short positions, but given that the MXN is due for a correction, sustained net long positioning is unlikely.
Colombia: The USD-COP remained below the 3800 level once again yesterday, keeping to within a fairly tight trading range that we have seen since the start of March. Momentum remains lacking at the moment and we could see this persist over the coming sessions ahead of the Banrep meeting. If the central bank hikes by the 150bp as expected and signals more hikes are to come, the pair may find it the catalyst needed to break below 3750. Near-term implied vol levels, meanwhile, are rising ahead of the meeting, with the 1-week tenor up to 17.655% currently.
Chile: The peso consolidated after strong gains recorded on Friday. The currency finished the Monday session at 778.96. The next major support level for the USD-CLP comes in at 761,30, which is the 61.8% fibo retracement level. Ahead of the local open we have seen the emerging market FX complex trade stronger; however we expect a measured start to the session given that its MPC day.
Peru: The PEN firmed yesterday ahead of Castillo’s impeachment vote, highlighting what little risk was being priced in that he could be ousted. As a result, we won’t see much in the way of a relief rally today, especially given that the country’s political situation is still very fluid and uncertain. The 3.7000 level remains the dollar support to keep an eye on, while the downside for the local unit is being contained by the 50DMA at 3.783 currently.
Fixed Income: All eyes on Chile as a larger rate hike may be announced
Brazil: Notwithstanding the weaker than expected tax collections data, depreciation in the BRL, and risk-off sentiment linked to the Shanghai lockdown, Brazilian bond yields continued to edge lower on Monday. Movements on the front-end were modest, with the 2yr yield, for instance, edging 1bps lower. However, movements further out on the curve were more pronounced, with the benchmark 10yr bond yield shedding 8bps to close the session at a near 3-week low of 11.68%.
While still elevated in comparison to many of its emerging market peers, Brazil’s 5yr USD credit default swap, which we use as a proxy for fiscal risk, fell for a third straight session on Monday, dropping to 213bps. Moreover, it is worth noting that at levels just above 200bps, it indicates that the market is not overly concerned about Brazil slipping into a position of fiscal distress.
Mexico: There was some reprieve for Mexican bonds yesterday as hopes of cease-fire talks between Russia and Ukraine led to a reduction in haven demand as US Treasury yields moderated. This same narrative does not appear to be holding ahead of the US Open, as US Treasury yields have begun to rise. Investors continue to assess developments in the conflict, commodity prices, and the Fed's fight against pricing pressures, which is keeping uncertainty rife on trading floors and the rout in bond markets in place. A lack of local triggers will see the domestic bond market take its direction from external developments.
Colombia: Colombia's local currency bonds firmed yesterday amid some improvement in local sentiment following a few days of underperformance. Dollar-denominated bonds also had a positive session yesterday, with yields down by as much as 7bp. Both curves experienced some further flattening pressure, which we expect to remain entrenched through the coming sessions, given the focus on inflation and what it means for interest rates going forward. Looking at the 10v2 spread, we see that it is trading not far off from its recent low of around 87bp, with this level expected to give way in the coming sessions.
Chile: The 2v10 swap spread remains anchored at -192 bpts currently as the market heads into the rate decision today. The expectation is that we see marginal position adjusting throughout the course of the session, given that the decision takes place at 17.00 local time. That said, we have seen some trimming of payer positions of late with the likes of the 2yr paring back from a close of 8.37% on the 24th March to 8.15% currently, equally the longer-dated tenors have also moderated, 10yr is quoted at 6.23% off the highs of 6.46% close recorded last week
Peru: It was a very mixed session for local currency government bonds yesterday, while dollar-denominated bonds generally strengthened on the session, flattening the curve to some degree. We may see a bit of a relief rally today given that Castillo has survived his impeachment, although the moves may be fairly minor given that there was very little risk of him being impeached priced into the market. Beyond that, global bond markets remain on the defensive with equities being preferred. This will continue to weigh on local bonds through the coming weeks as rising inflation and global policy tightening will remain key themes.