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Conclusion: Both leading market price indicators and lagging economic fundamentals lend us further conviction in our expectation of a monetary easing cycle across Latin America over the intermediate term.



  • Equities: Latin American equity markets are trading down -2.1% wk/wk as of now. Argentina, a country we remain fundamentally bearish of, led decliners (-5.4% wk/wk).
  • FX: Latin American currencies closed down -0.6% w/wk vs. the USD, led to the downside by Brazil’s real and Mexico’s peso (down -3.8% and -2.9%, respectively).
  • Fixed Income: Latin American sovereign debt yields generally increased wk/wk, highlighted by the backup across Mexico’s maturity curve: 2yr up +8bps; 10yr up +15bps; and 30yr up +20bps. Yield curves mostly compressed across the region as slowing growth remains an issue.
  • Credit: 5yr sovereign CDS broadly widened wk/wk, trading up +1.5% wk/wk on a median percentage basis. Venezuela held out, tightening -32bps or -3.4%.
  • Rates (1yr O/S Swaps): Bullish wk/wk action across Latin American interest rate swaps markets; Mexico widened +24bps wk/wk and Brazil continues to trade a full -112bps below the central bank’s policy rate.
  • Rates (O/N): Interbank rates signaled a broader easing of liquidity across Latin America, with Brazil seeing a -5bps wk/wk decline. Conversely, Mexico saw a +5bps wk/wk tightening.


Brazil’s growth/inflation outlook augers well for continued monetary easing:

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That view is being priced into various fixed income and interest rate markets throughout Brazil:

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The Currency Crash in the Mexican peso suggests Agustin Carstens and Co. might be next to join Brazil in lowering interest rates:

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Growth Slowing:

  • Brazil’s real GDP growth slowed in 3Q to +2.1% YoY vs. +3.1% prior; flat sequentially (QoQ) vs. +0.7% prior. Brazilian retail sales growth slowed in Oct; inflation-adjusted sales grew +4.3% YoY vs. +5.2% prior; unit volume growth came in at +1.6% YoY vs. +4.7% prior.
  • Mexican consumer confidence ticked down in Nov to 89.5 vs. 90.6 prior. Industrial production growth slowed in Oct to +3.3% YoY vs. +3.6%.
  • Chilean economic activity growth slowed in Oct to +3.4% YoY vs. +5.7% prior. Export growth slowed in Nov to +0.3% YoY vs. +18.2% prior.

Deflating the Inflation:

  • Brazilian CPI slowed in Nov to +6.6% YoY vs. +7% prior; the continued slowing remains in-line with our models and the central bank’s expectations, which point to CPI falling to the mid-point of the target range (+4.5%) by year-end 2012 – a forecast that is inclusive of the recent rate cuts. Antonio Fraga, a former Brazilian central bank head now on the buyside, expects Brazilian interest rates to fall to a record low under President Rousseff, whose administration has been applying well-documented pressure to the central bank to continue lowering interest rates.

Sticky Stagflation:

  • Chilean CPI accelerated slightly to +3.8% YoY vs. +3.7% prior.
  • Venezuelan CPI accelerated in Nov to +27.6% YoY vs. +26.9% prior.

King Dollar:

  • Per Brazil’s Deputy Finance Minister Nelson Barbosa, the country plans to rely further upon monetary easing (both trailing and future) and less upon fiscal easing to stimulate the economy in 2012. Moreover, he confirmed that the country would not rely upon a widespread expansion of state-directed lending as seen in the 2008-09 downturn. As highlighted in our Black Book on Brazil, this is positive for the long-term health of the Brazilian economy, as backdoor capital injections into these banks will be limited to R$25B vs. R$100B-plus in previous years. Net-net, we expect further rate cuts and a potential for fiscal metrics to “miss” expectations to weigh on the BRL going forward. To the former point, the 1y O/S swaps market is trading 112bps below the current Selic target rate and Brazil’s interbank futures market is pricing in three additional -50bps cuts by next August. To the latter point, the central bank is forecasting +3.5% GDP in 2012 – a full 150bps below the government’s +5% target, which suggests to us that revenues may come in light next year and widen the deficit relative to the official target.
  • After a -15.6% peak-to-trough decline in the Mexican peso through the end of Nov (a call we had clients well in front of), we saw Mexican CPI accelerate to +3.5% YoY in Nov vs. +3.2% prior. The +1.1% MoM gain was the largest sequential acceleration since Jan ’10. The weakened currency poses intermediate-term upside risks to Mexican inflation, so much so that the central bank has taken to auctioning $400M of its FX reserves daily to lend a bid to the ailing peso.
  • Colombia CPI came in unchanged in Nov at +4% YoY while PPI slowed to +6.8% YoY vs. +7.9% prior. Our models point to this being right around the intermediate-term peak in Colombian CPI – a view supported by the aforementioned easing of Colombia’s supply-side inflationary pressure. As such, we do not expect further interest rate hikes out of Colombia over the intermediate term as growth slows and inflation peaks.


  • Mexico’s IMEF manufacturing and services PMI readings both ticked up in Nov to 53.3 (vs. 51.4 prior) and 54.1 (vs. 53 prior), respectively.

Darius Dale

Senior Analyst

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