Morning Note /

Latam Daily: Proposed Chilean constitution changes could upend the mining sector

  • Talking Points: Brazil GDP, Colombia CPI data in focus through the weekend

  • Forex: MXN the underperformer as commodity shock hits it hardest

  • Fixed Income: Recent curve steepening may give way as front-end may underperform

Lloyd Miller
Lloyd Miller

Head of Developed Markets and Latin America Research

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

Talking Points: Brazil GDP, Colombia CPI data in focus through the weekend

Brazil: Amidst all the negative news relating to the devastating conflict in Ukraine, there is some positive domestic news to report back on. Official data published on Thursday revealed that Brazil recorded a larger than expected trade surplus in February. Specifically, Brazil posted a trade surplus of $4.05bn in February, up from a small deficit of -$176mn in January. This marked the strongest February reading in 5 years. According to the Economy Ministry, exports jumped 32.6% y/y to $, underpinned by a 22.6% expansion in volumes and a 13.5% increase in prices. Imports meanwhile rose 22.9% to $18.9bn.

The Economy Ministry said earlier this year expected a record trade surplus of $79.4bn this year due to a decline in imports amid more moderate growth in global trade. Note that the forecast was made prior to Russia’s invasion of Ukraine. While Brazil has some exposure to Russia, it is not overly exposed, according to data from the OEC.

There is some key data out of Brazil today. It is widely expected that Brazil recorded modest growth in Q4. Expectations are that Q4 GDP will print at 0.1%, which would mark a modest increase from a contraction of -0.1% in Q3. The services sector should rebound by around 2.7% on the back of the reopening of the economy. Moreover, the lifting of restrictions should have resulted in an advance in both household and government consumption. Investment, on the other hand, likely suffered. If the Q4 prints in line with expectations, Brazil’s 2021 GDP would sit at 4.8%..

Mexico: Banxico’s monthly survey of economists published on the central bank’s website yesterday raised this year's inflation forecast to 4.78% from 4.42% in the previous forecast, owing to a surge in energy costs that’s at risk of intensifying due to Russia’s invasion of Ukraine. Mexican policymakers will be on the lookout for second-round inflationary effects due to the conflict, which has yet to materialise in the eurozone but will be forthcoming. Next year, the central bank sees inflation rising to 3.83% from 3.73%, previously. Economic growth, meanwhile, was cut to 2.04% from 2.27% as the Ukraine war is set to weigh on global economic growth, raising fears about stagflation.

The day ahead has gross fixed investment, automotive exports, and production data scheduled for release. Concerning the latter, gross fixed investment (GFI) is expected to have risen by 5.5% y/y in the final month of 2021, compared to a reading of 5.9% y/y in November. Though the y/y figures remain distorted by statistical base effects, GFI remains under pressure from the government's nationalist agenda and tight fiscal policy. As such, we could see a further decline in the m/m figures in December after investment activity fell by 0.1% m/m in November. On balance, investment activity is still lower than before the pandemic due to a delayed rebound in the construction sector and machinery investment

Colombia: The Colombian data card heats up over the weekend, with February CPI numbers scheduled for release. Consensus expectations as per Bloomberg surveys are for a further rise in inflation from 6.94% y/y to 7.60% y/y, primarily owing to higher non-core inflation and base effects. Core inflation may also rise, however, due to accumulated currency depreciation, imported inflation, supply constraints, and strong demand in Colombia. While a continued rise in inflation will bolster the argument for more aggressive rate hikes in the months ahead, the ongoing disruption caused by the Russia-Ukraine war and consequent sanctions, and the toll they could exert on global growth and inflation, will be a major headache for policymakers in the months ahead. For now, however, it appears as though market positioning is broadly leaning towards prolonged support for the slowing global economy, rather than aggressive policy action to fight mounting short-term inflationary pressures.

Chile: Writers of the new constitution are currently tackling various proposals which could impact the mining sector. The writers need to vote on the following articles, which have the ability to upend mining investment in the copper and lithium sectors. The first one that has rung alarm bells is the one that bans private ownership of nature, from the air to the subsoil, the second is a proposal that would ban any projects which could damage nature, and the third requires indigenous groups to approve any projects. If any of these make it into the constitution, we would expect a severe backlash from the investment communities.

Another interesting point to note is that the Fiscal Council chaired by Jorge Desormeaux has warned the new government that the economic growth projections by the outgoing government is above market expectations. The last Public Finance report projected growth of 3.5% which is higher than the 1.5%-2.5% range the BCCH anticipates in the latest Monetary Policy report. The issue is that should the government base its budget and forecasts on the higher value that could end up with higher debt to GDP outcomes and lower tax revenues than they had planned for if growth undershoots. Given the current geopolitical and global economic backdrop, we would favour a more conservative stance on growth for 2022.

Peru: The metals markets were generally bid yesterday and we expect tight supply conditions to remain a feature over the near term. Copper, for instance, has remained topside focused however the gains have not been of the same magnitude as nickel and aluminum. That said, we are currently trading clear of the $10500/tonne mark touching fresh 2022 highs of $10590/tonne earlier in the session. These high prices, as well as for gold, are supporting Peru's terms of trade, as we noted in yesterday's report. The big question now is whether Peru will be able to take advantage of such high commodity prices, given the disruptions we have seen within the mining industry recently. For now, however, the high prices will continue to provide a bit of support to the local currency

Forex: MXN the underperformer as commodity shock hits it hardest

Brazil: The BRL returned to its winning ways yesterday as elevated commodity prices and stronger than expected trade data provided support for the bulls. The BRL was the second-best performing EM currency on Thursday, gaining 1.49% against the USD to close the session at 5.0273, according to Bloomberg data. Commenting on the BRL, President Bolsonaro said he hopes the local currency strengthens below 5/USD during today’s session to help balance fuel prices due to oil cost increases. Since the start of the year, oil prices have risen by almost 22%, while the BRL has strengthened by just shy of 11%. While we see room for further appreciation in the BRL, it is unlikely that it will be enough to offset the surge in international oil prices.

Mexico: The USD-MXN rallied to an intraday high of 20.7754 yesterday after Russia’s attack on the Zaporizhzhia nuclear plant generated a fresh wave of risk aversion and rush to safe-havens. While Ukraine emergency services said there was no immediate risk to the nuclear power facilities, investors are trimming their risk exposure ahead of the weekend. The pair has firmed, as a result, and is likely to target a break above the 20.800 resistance, which would open the way for a move higher to the 50.0% Fibo retracement level at 20.8770. Since Russia’s attacks on Ukraine began, the USD-MXN has lost 0.3%, alongside its Latam FX peers, owing to the tailwind from a surge in commodity prices and not being directly related to developments in Ukraine. On a year-to-date basis, however, the MXN has underperformed its peers. Volatility levels, however, remain high and will continue to be a cause for concern.

Colombia: Following a third successive daily advance on Thursday, the COP looks set to end the week as the best performing EM currency. The COP has gained more than 4.0% week to date, supported by high commodity prices and the fact that the EM investible universe has shrunk with investors avoiding exposure to Eastern Europe. Whether the COP can maintain this bullish momentum into the weekend, however, remains to be seen, as some investors may see prevailing risk-off trading conditions as the perfect opportunity to book profits.

Chile: The local unit took its direction from a stronger copper price yesterday and as a result the USD-CLP closed below the 800 handle once again. The pair finished the session at 796.25, with the momentum fading as the session matured. For now the first major support level can be found at 792.15.

Peru: The USD-PEN slid yesterday as high commodity prices added some support to the local unit. The pair ended the day at 3.73, but reached an intraday low of 3.7085. It bounced off the 76.4% fibo retrace of 2021's lows and high at 3.709, and we could see this level tested again in the sessions ahead. A break below here opens the door for the pair to head towards the 100% retrace at 3.5753. .

Fixed Income: Recent curve steepening may give way as front-end may underperform

Brazil: The bear flattening bias in Brazil’s swap market remained intact yesterday as traders increased bets that the Selic rate could rise above the 13% mark at the end of the current hiking cycle as international commodity prices continue to surge, fuelling inflation concerns. The DI curve is pricing in more than 110bps worth of rate hike risk for this month’s Copom meeting, just under 80bps for the May meeting and just over 50bps for the June meeting. Following the recent spike in international oil and food prices, traders have scaled up bets of a possible 25bps rate hike in August.

Sticking with oil, OPEC+’s announcement yesterday also did little to calm the markets, with the expected 400k barrel per day increase announced. Yesterday’s meeting ended in a record time, with no discussions being had surrounding Russia, according to sources familiar with the matter. OPEC appears to be happy to just sit on the sidelines, for now, reaping the benefit of higher oil prices and possibly higher export numbers as Russian crude will need to be substituted with that from the Middle East and other exporters. This morning oil is trading a whisker below $120/bbl, suggesting that the bear flattening bias is likely to persist.

Mexico: Mexican swap rates were paid higher across the IRS curve yesterday as investors react to the macroeconomic backdrop. The potential for supply chain disruptions from the Russia-Ukraine war, the Mexican and global economies again face the prospect of stagflation as inflation quickens and growth fades, compelling Banxico to choose which to tackle. The choice is considerably more difficult now than it was during the early days of the pandemic. Back then, monetary policymakers chose to buoy demand as a recession hit. Now inflation is at multi-decade highs, forcing policymakers to focus on runaway prices, although remaining sensitive to the need to move more slowly than first forecast.

Colombia: Colombian bonds have attracted very strong demand this week, with yields falling sharply across the curve despite broader market concerns over the ongoing Russia-Ukraine war. Investors are shrugging off election risk and piling back into Colombian debt given the country’s low exposure to Russia and Ukraine. The EM investable universe has shrunk significantly since Russia’s invasion started, and Colombian debt has turned extremely attractive due to the relatively high yields on offer when accounting for its credit rating. Colombian bonds may this continue to outperform in the near term, at least until the dust settles and political concerns return to the fore.

Chile: Payers more broadly remain in control for both swaps and bonds at the moment, however there has been an element of consolidation in terms of curve inversion pressures. The 2v10 has moved away from the all-time lows recorded earlier this week currently quoted at -158.50 bpts, we are certainly not out of the woods though. The front end is likely to underperform the longer end for the foreseeable future as oil and commodity prices scale new highs.

Peru: Local bonds continued to weaken yesterday, with yields rising across the curve barring the very front-end, which continued to see some relief from the less hawkish Fed, which has taken away chances of a 50bp rate hike this month in the US. It remains difficult to call a direction in the markets at the moment. What we can note, is that Latam bond markets should be favoured once the dust settles given their limited exposure to Europe. Bonds are also looking fairly cheap across the region at the moment, with Peru's strong credit rating making it a standout