Morning Note /

Mexican CPI to affirm Hawkish outlook for Banxico

  • Talking Points: Protests keep rocking Peru, Brazilian markets return today

  • Forex: BRL resilience holds up amid soaring commodity prices

  • Fixed Income: Global bond yields keep surging as central banks turn more hawkish

Lloyd Miller
Lloyd Miller

Head of Developed Markets and Latin America Research

Daron Hendricks
Danny Greeff
Kieran Siney
ETM Analytics
22 April 2022
Published byETM Analytics

Talking Points: Protests keep rocking Peru, Brazilian markets return today

Brazil: Brazilian markets return to trade today. Domestic markets will play catch up after being closed on account of Tiradentes Day yesterday. Market focus remained centred on the hawkish shift from developed market central banks. The focus for many traders is squared on the May FOMC meeting. A 50bp rate hike will be on the table at the May meeting, according to Fed Chairman Powell, as inflation runs at three times the Fed's target. In terms of local monetary policy, the focus remains on BCB President Roberto Campos Neto, who remains in Washington and is scheduled to meet US Treasury Deputy Secretary Wally Adeyemo at 14:00 local time. As always, comments from Campos Neto have the potential to result in fresh price action for domestic markets.

Mexico: The day ahead will see Mexico publish early inflation figures for April, which are estimated to have risen further, but at a considerably slower pace than seen in recent months. The median forecast in a Bloomberg survey forecasts the bi-weekly CPI reading rose to 7.63% y/y from 7.62% y/y in the second half of March, remaining well above the central bank's target and reinforcing bets that the central bank will continue raising interest rates. On the other hand, core inflation is estimated to climb to 7.10% y/y, its highest level since January 2001. The Bank of Mexico, which targets inflation of 3%, with a one percentage point tolerance range above and below that, has increased the benchmark rate by 250bps in its last seven monetary policy meetings to 6.50%. According to the central bank's latest monthly poll, analysts forecast that the lending rate ending the year at 8%.

Colombia: Conservative presidential candidate Federico Gutierrez put forward some of his economic plans yesterday. He noted that Colombia should have a more flexible labour market, in which workers can be compensated per hour without affecting employee benefits. Gutierrez maintains that hiring workers per hour could expand job formalization, which is a key issue in Colombia at the moment. Additionally, Gutierrez said that he would focus on decreasing government expenditure to shore up the fiscus, in particular by cutting government bureaucracy by 10%. However, he did not rule out presenting a new tax bill to Congress, but said the government must make an effort to cut spending first. Other proposals included keeping the mixed private-public pension system, redirecting pension subsidies to the poor, and training programmers to prepare Colombia for the fourth industrial revolution.

Today, an empty local data card means the focus will be on the Colombian presidential debate, which could help undecided voters to pick a candidate in what is shaping up to be a very polarised election.

Chile: Against the backdrop of the constitutional assembly debating dozens of articles regarding mining, water and environmental issues we have the Tesla Chief Elon Musk calling for the world to produce more lithium. As it stands Chie and Australia account for some 81% of global lithium production, which does pose significant supply risk to Tesla, it does however conversely offer a significant opportunity to Chile from a structural perspective.

The structural tailwind that Chile can enjoy if it gets its investment mix right is that the world is on a decarbonisation drive. Not only does this benefit the lithium producers who use the product in the manufacture of batteries but equally copper which is used in the electrification process, everything from wire to electronic circuits contains copper.

Thus as mentioned in the point above, the Chilean’s have everything to gain, but equally much to lose if they alienate the investment community. It is imperative that a balanced pragmatic approach is taken when drafting laws that impact the mining sector. Voting on the 52 articles started yesterday and is expected to conclude today..

Peru: Protests continue to rock Peru, with farmers across the country now blocking roads as they demand the dissolution of Congress and agrarian reforms by President Castillo. This adds to other protests we have seen across the country, impacting the mining sector as well as in major cities such as Lima. Inflation and supply shortages continue to drive dissent among the population and will be difficult for officials to enact any measures that will ease these pressures in the near term. Therefore, we could see further protests over the coming weeks, increasing pressure on the president and Congress which may lead to measures that provide some short-term reprieve at the cost of longer terms growth and economic prudence.

On the topic of mining, Peru's Breca Group has said that it is not selling any of its mines, contrary to a report doing the rounds in local media. A local website reported that the Brescia family is selling their mines through Citi. The group owns the Minsur mine, the world's second-largest tin producer. The report would have been another blow to Peru's mining sector if it were true, as it would send a signal that locals have very little confidence in the economy. The fact that the mines are not being sold, however, will help ease some concerns, although the ongoing social unrest in the country will remain at the front of investors' minds.

Forex: BRL resilience holds up amid soaring commodity prices

Brazil: Soaring commodity prices have been one of the main contributors to the stellar performance of the Brazilian real this year, with Brazil’s trade account benefitting hugely from the spike in international commodity prices. Brazil’s terms of trade have risen significantly compared to pre-pandemic levels, which, together with the aggressive monetary policy tightening that has pushed Brazil’s real interest rates back into positive territory, have boosted the BRL’s carry appeal. ETM’s Carry Attractiveness Model ranks the BRL as one of the most attractive currencies from a carry trade perspective.

In addition to the BRL’s high carry attractiveness, it is worth mentioning that the currency’s resilience score has risen sharply in recent months. We define a currency’s resilience as its ability to handle external shocks to the global economy and adverse market conditions. There is a host of evidence to suggest that macroeconomic policy is one of the biggest determinants of this, as is the underlying structure of an economy, which through time is affected by macroeconomic policy. The main factor underpinning the improvement BRL’s resilience is the monetary rectitude, which has risen sharply on the back of the aggressive tightening as the central bank seeks to rein in inflation. The combination of the BRL's high carry score and improvement in resilience makes the BRL an attractive bet for currency traders.

Mexico: Yesterday was a bullish day for the USD-MXN, rallying 1% to briefly claim a one-month high before settling below the 20.200 mark. The pair was the third-best performer in the emerging market currency basket but is on track to be the second-best weekly gainer, up more than 2%, as it has continued its rally this morning. The USD-MXN has jolted higher, easily breaking above the 50DMA resistance at 20.324, bringing the 100-and-200DMA technical indicators into focus. The spike in UST yields underpins the MXN weakness and suggests that the local currency will be hard hit if yields continue to rise. Though the MXN resisted the rise in UST yields in March, its resilience may be considerably more difficult to sustain given its economic growth woes. More so, if Banxico does not keep up with the policy rate hike pace of the Fed, the MXN could come under significant pressure.

Colombia: The COP has been unable to hold out against a broadly-firmer USD at the start of the week, as it retreated 0.45% yesterday to add to Monday’s 0.30% decline. This has been consistent with regional currency performances, although yesterday’s move was slightly more pronounced due to an oil-market selloff on the day. Pulling the lens back slightly, the COP remains strong relative to levels seen in January, but is struggling to build further bullish momentum to recover all of its Q4 2021 losses.

Chile: A dollar that remains strongly underpinned above the 100.00 handle which is preventing many emerging markets from gaining a footing at the moment. This coupled with a copper price which is on track to record a weekly fall, has put peso bulls to the sword. For now we remain buyers on any dips as the USD-CLP has closed clear of the 100DMA and could stretch to the prior high of 832.75.

Peru: The USD-PEN tested the 50DMA resistance at 3.7374 yesterday as emerging market currencies came under pressure from a stronger USD after Fed Chair Powell suggested more 50bp rate hikes could be on the cards. This keeps the pair near the top of its recent trading range, although we could see the pair's bias remain topside focused over the near term given the global risk-off conditions and the local issues that continue to plague Peru.

Fixed Income: Global bond yields keep surging as central banks turn more hawkish

Brazil: While much of the focus for fixed-income traders is centred on monetary policy amid surging global inflation and the hawkish pivot from central banks to combat soaring consumer prices, fiscal dynamics continue to play an integral part in the pricing of sovereign bonds. According to the market-discipline hypothesis, bond yield spreads over an appropriate benchmark bond signal the financial market's assessment of the sustainability of a government’s fiscal policy. Generally speaking, weak fiscal discipline and rising credit risk are reflected in higher borrowing costs for governments. Interestingly, while Brazil and South Africa share the same credit rating by Moody’s, which is used as a proxy for fiscal risks, the countries’ bond yields are trading at vastly different levels. According to Bloomberg data, Brazil’s 10yr bond yield is trading at around 12.19%, while the comparable SA bond yield is trading at 10.72%. This suggests that Brazilian bonds are arguably more attractive than similarly rated South African bonds for investors seeking yield.

Mexico: It was a mixed performance by Mexican bonds yesterday. Front-end bond yields rose, while yields on the belly and the long end of the curve fell. After Jerome Powell hardened his hawkish tone, bond markets have come under renewed pressure as they brace for more aggressive rate hikes. The local bond market is set for a weekly loss.

Pemex bonds fell to fresh lows as the state-owned oil giant prepares to resume paying its debt, halting a government policy of covering its amortisations. FinMin Ramirez de la O said Pemex has the cash flow to make its debt payments, adding that the government would be fully behind Pemex should the company need its support. Pemex owes about $2.5bn in principal payments this year and another $2.5bn in interest. According to Bloomberg, the company’s dollar debt due in 2032 fell to an all-time low of 88.4 cents, while notes maturing in 2050 also touched a record low of 79.9 cents..

Colombia: Colombian bonds have started the week off on the defensive, with yields rising notably across the curve since the long weekend. This is unsurprising given how US Treasury yields have surged recently, with Colombian bonds trading in sympathy. Interestingly, moves along the Colombian yield curve have been particularly pronounced at the belly, likely reflecting growth concerns for the period following the current tightening cycle. The broader bias for yields also remains to the topside, although falling UST yields today suggest there may be a reprieve for the market.

Chile: The front end of the bond curve witnessed paying interest as the inflation risks remain embedded in the broader economic backdrop. Not only do we have elevated energy prices but food prices are stubbornly high as well and there is no end in sight, at least in the short term. These factors coupled with supply chain challenges will ultimately find expression in the CPI figures, which will influence how the Central will need to respond. Today we have the release of the PPI number which will give insight into the factory gate inflation and how this potentially passes through to the consumer basket in due course.

Looking at the swap curve, we see 2v10 consolidating around -135 bpts after touching a high of -97.50 bpts at the start of April, the market seems to be content around current levels and we hold the view that investors will digest the new round of data over the coming weeks before making a firm directional call.

Peru: The trend higher for local bond yields continued yesterday, taking the likes of the 2040 yield to within touching distance of the 8.00% handle. Given the current global macroeconomic backdrop and the local social and political issues, it is unlikely that we will see any notable rebound for bonds in the near term. With the investable EM universe shrinking on account of Russia and Turkey being deemed uninvestable, Peru was in a place to benefit. However, the local issues suggest that once the dust settles, investors may favour some of its peers such as Brazil instead.