Morning Note /

Latam Daily: Recoveries holding up, but focus still on global inflation

  • Brazil and Colombia economies still rebounding strongly

  • Chile’s President avoids impeachment

  • Central bank governors to take part in Argentine online event

Lloyd Miller
Lloyd Miller

Head of Developed Markets and Latin America Research

Danny Greeff
Daron Hendricks
Kieran Siney
ETM Analytics
17 November 2021
Published by

Talking Points: Brazil and Colombia rebounding, Chile’s politics in focus

Brazil: It was a busy start to the shortened week. On the data front, the central bank’s economic activity print came in slightly better than expected. In line with expectations, the data suggests that the economy contracted in the third quarter of 2021. Specifically, the BCB’s economic activity index, which is used as a proxy for GDP, fell by -0.27% m/m in September. Note that economists had pencilled in a slightly more pronounced decline in economic activity of -0.30%. Note that the August reading had been revised down to -0.29% m/m. On an annual basis, growth in economic activity slowed to 1.52% in September from 4.74% in August. Yesterday’s data suggests that Brazil’s economy may have slipped into a technical recession, a period of two consecutive quarters of economic contraction. The BCB’s economic activity gauge suggests that economic activity contracted by -0.14% in Q3, which precedes a 0.1% decline in the previous quarter. The official GDP print is scheduled to be released on December 2.

The central bank’s September economic activity print added to mounting concerns over Brazil’s economic outlook. Yesterday, BCB President Roberto Campos Neto flagged concerns over Brazil’s economic and debt outlooks as the central bank aggressively raises interest rates in a bid to contain soaring inflation. Campos Neto said that the lack of reforms and the possible erosion of Brazil’s austerity laws put into question how much Brazil’s economy can expand without inflation, with negative consequences for debt dynamics. Campos Neto added that this explains why Brazil’s risk premium has increased even as debt levels remain better than forecast.

Mexico: With a shortage of economic data releases this week, the focus has shifted to political developments. Yesterday saw the Mexican Supreme Court declared the ruling party’s (MORENA) bid to extend the tribunal's chief justice period in office as unconstitutional. Recall that in April, Congress agreed to prolong Supreme Court President Arturo Zaldivar’s term by two years, which sparked worry among critics of the government, who saw it as a potential test run for extending Lopez Obrador's mandate beyond 2024. Obrador had argued that extending Zaldivar's term as head of Mexico's highest court was necessary so that he could oversee a package of reforms of the judiciary.

In other news, the Board of Directors of the Chamber of Deputies appointed the former Federal Deputy of Morena, Pablo Gomez, as the new Head of the Financial Intelligence Unit (UIF). The announcement comes a week after Santiago Nieto resigned as Head of the FIU after criticism from his wedding with the counsellor of the National Electoral Institute (INE), Carla Humphrey, in Guatemala.

Colombia: Colombia's economy rebounded faster than anticipated in Q3, led by strong performances in the retail and manufacturing sectors as fewer lockdowns and expansionary fiscal and monetary policy provided notable support. This was reflected in GDP data released yesterday, which showed the economy expanded 5.7% q/q in the three months through September, up from a 2.5% q/q contraction in Q2. Accordingly, Colombia's GDP is back above pre-pandemic levels for the first time, with growth set to moderate slightly from here. Nevertheless, Colombia's output gap is set to close sooner than previously thought, with this supporting the argument for BanRep to move more quickly in its monetary policy normalization process.

In other news, Colombia's national mining agency will begin taking offers in its first bidding round for gold exploration contracts in early 2022, as it continues efforts to diversify its mineral output. The country has for some time now suggested that its largely untapped deposits of gold and copper, among other minerals, will be the future of its mining industry, especially amid output and price troubles for coal.

Chile: News out on the wires early this morning is that those aiming to impeach the current President Sebastian Pinera were unable to secure enough votes in the upper chamber of parliament to force the Presidents hand and make him resign over the corruption allegations brought on from the Pandora papers investigations.

Keeping with politics, it would seem that the ultraconservative José Antonio Kast is making strong headway in the polls ahead of Sunday’s presidential elections. Kast has promised a tough approach to crime as well as streamlining the state, while equally praising the economic legacy of the former dictator Augusto Pinochet. His acceleration in polls came following a bout of street protests and violence which was blamed on the left. “They call us intolerant and extreme, because we speak the truth and say things head-on. Unlike the Left, we have never endorsed violence,” Kast wrote on Twitter in late October. His critics have however likened him to right-wing populist leaders such as Bolsonaro and Trump following his views on immigration and his disdain for the political class, he has called Congress a “circus.”

Peru: Central bank Chief Velarde was on the wires yesterday, stating that the central bank is looking at launching a digital currency. The bank is currently involved in a lot of projects with other central banks, including those from India and Singapore. These comments come after new central bank board appointees Barrantes and Tavara called for increased use of digital payments. In terms of the economy, Velarde noted that private investment in Peru in 2022 may turn out to be slightly positive instead of the previous projection of no growth. This is mostly due to forecasts for the mining sector, which could see investment growth of 8% next year according to the central bank's forecasts.

On the inflation front, the BCRP Governor sees pressures as still transitory, but that they may remain embedded into early 2022. This suggests that the bank will remain fairly hawkish, especially if upcoming data point to still increasing price pressures. Velarde will be speaking again today at an online event organized by the Argentine central bank..

Forex: Currencies still under pressure as USD surges

Brazil: While the BRL kicked off the short week firmer, the gains in the local unit were short-lived, with BRL reversing its earlier gains after failing to sustain a break below the 50-day moving average to end the session in the red against the USD. Specifically, the BRL lost 0.76% against the USD on Tuesday to end the day at 5.4976. The losses in the BRL were partly driven by a sustained rally in the USD following some more upbeat economic data out of the US.

Although the BRL has sold off in the past two sessions, it is worth noting that the BRL has strengthened over the past two weeks, with traders adjusting their positions in the currency after what seemed to be an over-extended sell-off. According to data from the B3 exchanged, foreigners have reduced their short BRL positions through derivatives by some $4.4bn since the start of the month.

Mexico: The USD-MXN advanced yesterday, temporarily piercing above the 20.800 mark, a two-week high due to the USD rising to a one-year high off the back of upbeat US economic data that hurt emerging market currencies. The pair settled the day at 20.7600. Increased dollar strength will continue to hurt the MXN and suggests that the USD-MXN November highs around the 21.00-handle are likely to come into the crosshairs in the coming sessions.

Colombia: Rising oil markets were not enough to support the COP in a very bearish trading environment yesterday, with the currency depreciating around 0.25% through the session to close just under the 3900/$ mark. This was largely due to a soaring USD amid growing bets for more aggressive Fed tightening on the back of strong US data, with the market only set to react to Colombia's strong GDP numbers today.

Chile: A weaker copper price and stronger dollar allowed the USD-CLP to resume its upward trend and we closed above the 810 mark at 812.03. The pair did close in some technical congestion and this suggests potentially a messy open, we do however favour the upside and would be buying on any dips.

Peru: The USD-PEN edged higher yesterday as the greenback continued to surge amid strong US economic data and hawkish comments from Fed members. The pair tested the 4.000 handle but failed to break above it, although liquidity levels have reportedly dropped once again with foreign investors sticking to the sidelines as the government remains relatively unstable following more resignations and a lack of support among its allies. The 4.000 handle will remain the level to watch as a result, with a break above opening the door back towards the 10DMA at 4.0314 and the 50DMA just beyond that at 4.0491.

Fixed Income: Colombia coming to the market today

Brazil: Tracking the losses in the BRL, Brazilian bond yields kicked off the week on the back foot. Yields across the curve traded higher, with the 2yr and 10yr yields rising by 11bps and 10bps to 11.67% and 12.05%, respectively. The rise in shorter-dated Brazilian bond yields came despite a lower than expected November IGP-10 inflation print as traders continue to bet the central bank will struggle to rein in inflation to within its target in the next two years. The bearish bias in yields on the long end of the curve was partly due to more negative fiscal news. News outlet Folha reported that the economic team agreed to raise public sector wages. However, the economic team warned that the measure would require cutting expenses in other areas of the budget.

Mexico: The local bond market opened the new week cautiously following its long weekend. Most maturities along the local yield curve were little changed. The 2yr bond yield ticked marginally higher to 6.7814%, while the benchmark 10yr yield inched higher to 7.4928%, resulting in the spread between the two tenors consolidating above 71bps. It is worth pointing out that the MXN10v2 bond yield spread is trading at a premium when compared to regional peers that are either trading in negative territory or around +/- 40bps. As far as the 5v2 bond yield spread goes, it compressed slightly yesterday to 49bps, ending three consecutive sessions of a widening spread from a low of 27bps last week Wednesday, a level last witnessed in July last year. Sustained front-end pressure on the yield curve from the gradual tightening of policy will continue to prop up other short-term tenors as a result, but with a lag as the impact of tighter policy settings take time to take hold. This suggests that we may continue to the 5v2 bond spread widening in the coming sessions. Note, the 5v2 bond spread hit a high of 128bps in June this year.

Colombia: Colombian bonds played catch-up yesterday after the long weekend, with selling pressure seen across the curve as investors remained concerns over mounting inflation. The stronger-than-expected GDP data released yesterday only added to these concerns, and triggered bets for more aggressive BanRep policy normalization in the months ahead. Simultaneously, strong US economic data, and what this means for prospective Fed monetary policy, weighed on the COP yesterday, with this likely also keeping demand for bonds contained.

Colombia will be auctioning linkers due in 2029, 2037, and 2049 today. Demand should be fairly robust given the outlook for inflation and after yesterday’s strong economic activity readings.

Chile: The 2v10 swap spread has settled down following an episode of major flattening which started at the beginning of October. The swap spread has flattened from 129.5 bpts to 43 bpts currently which to be fair is not unexpected given the level of monetary tightening that is baked into the front end of the curve. 2yr is currently at 5.11% while the longer dated is trading at 5.54% which is off the highs of 6.145% recorded on the 6th October. Looking ahead we see the same element of consolidation until we have cleared the GDP figures tomorrow which will give further insight as to whether or not we have reached peak economic recovery and what the potential fiscal trajectory will be going forward.

Peru: It was a relatively quiet session for local bonds yesterday, mirroring what happened in the FX market. Yields have stabilized now and we may need a new catalyst to see a break away from current levels in either direction. Focus today, therefore, may be on offshore dynamics with the UST auction, which could create some volatility within global FI markets if we see any surprise results. Glancing at Peru's CDS spreads and we see the 5yr holding around the 88.90bp mark. The 3yr, meanwhile, is also steady around 50bp, suggesting very little risk of a credit event is being priced in at the moment.