Weekly Latin America Risk Monitor: FX Sees Easing; Breeds Contempt

Conclusion: Recent moves throughout Latin American FX markets are supportive of our expectation for broader monetary easing across the region. Additionally, they are making the region’s most active government react rather squirrely.

 

PRICES RULE:

Latin American equity markets broadly declined last week, falling -2.4% wk/wk on a median basis.  Declines were led by Argentina, which closed down -8.4% wk/wk. Latin American currencies also broadly declined, closing down -1.8% wk/wk (vs. the USD) on median basis. The -3.6% declines in both the Brazilian real and Mexican peso led the way to the downside.

 

Latin American sovereign debt markets continue to price in expectations of slower growth and looser monetary policy – particularly in Brazil, where the central bank has already cut rates by -100bps in the current policy cycle. This regional slower-growth scenario is contributing to heightening expectations of credit risk, as evidenced by the region-wide widening of 5yr CDS (+5.6% wk/wk on a median basis). Latin American interest rate swaps markets are also pricing this outlook via easing speculation. 1yrs swaps tightened -19bps and -25bps wk/wk in Brazil and Colombia, respectively.

 

THE LEAST YOU NEED TO KNOW:

Rather than delineate these data points by country, given the varying size and importance of these economies, we thought we’d try something different by grouping them by theme. Ideally, this should make it easier to absorb and contextualize anything of significance. Lastly, the callouts below are from the prior seven days:

 

Global Growth Slowing:

  • Mexican consumer confidence ticked down in October to 90.6 vs. 92.4 prior.
  • Brazilian vehicle production and domestic sales growth tanked in October, falling -3.4% YoY (vs. +7.2% prior) and -7.5% YoY (vs. 1.5% prior), respectively.

King Dollar:

  • In the minutes of the Banco de Mexico’s October 14thmeeting, policymakers signaled that they would “react opportunely” to lower interest rates if an economic slowdown became a headwind for inflation.
  • In a mere 10 days after President Fernandez ordered Argentinean energy companies to repatriate export revenue (on a go-forward basis in a bid to prop up the Argentine peso amid heightened capital flight) Cnooc’s bid for BP Plc’s $7.1 billion stake in Argentine crude producer Pan American Energy LLC fell apart due to “legal reasons”. We’ve been vocal about the prospect of Fernandez’s recent spate of Big Government Intervention having a negative impact on Argentine trade and investment and this canceled transaction is in confirmation of that view.

Sticky Stagflation:

  • Colombian CPI accelerated in October (alongside global crude oil prices) to +4% YoY vs. +3.7% prior.

Counterpoints:

  • Mexican PMIs (both manufacturing and non-manufacturing) ticked up in October. The former advanced to 51.4 from 50.3 prior and the latter advanced to 53 from 49.5 prior. The country’s equity markets liked these extremely positive deltas, closing down only -10bps wk/wk (outperforming). Its currency market saw them as a head fake, however, falling -3.6% wk/wk vs. the USD.

Other:

  • Argentine benchmark dollar bonds yields fell on Friday by the largest amount on record (-113bps) after the President Kirchner surprise decision to cut utility subsidies for all commercial users. This is a definite positive for the Argentine government on the fiscal front, but a disaster for Argentine corporations who suddenly and abruptly have to remodel their cash flows and adjust their operations to comply with this new, higher-cost environment. No surprise to see the Merval index underperform the region substantially last week, as mentioned at the onset of this note.

Darius Dale

Analyst

 

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