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Conclusion: USD strength and the resultant knock-on effects continue to force the hands of international policymakers.

 

PRICES RULE

  • Equities: Regional equity markets closed down -0.9% wk/wk on a median basis, w/ Venezuela outperforming (up +0.6%) and Argentina underperforming (down -1.3%);
  • FX: Latin American currencies are up modestly vs. the USD wk/wk (+0.1%), w/ the Brazilian real outperforming (up +0.8%) and the Chilean peso underperforming (down -0.8%);
  • Fixed Income: Regional sovereign debt yields generally backed up across the maturity curve, w/ Brazil gaining +19bps wk/wk on both its 2yr and 9yr issues;
  • CDS: 5yr sovereign CDS closed +6.6% wider wk/wk on a median percentage basis, w/ Peru widening the most (+8.4% or +13bps) and Argentina widening the least (+2.2% or +22bps);
  • Rates (swaps): 1yr O/S interest rate swaps markets were flat wk/wk on a median percentage basis, bracketed by Mexico (+9bps wider) and Chile (-4bps tighter); and
  • Rates (interbank): O/N interbank rates backed up +0.3% wk/wk on a median percentage basis, bracketed by Mexico (+10bps wider) and Argentina (-25bps tighter).

Price tables can be found at the bottom of this note.

CHARTS OF THE WEEK

Growth in Brazil continues to be rather un-“BRIC”-like:

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As such, various markets continue to price in additional monetary easing measures out of Brazil’s central bank:

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Jumping ship, aggressive financial repression appears to have slowed capital outflows in Argentina – for now:

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KEY CALLOUTS

Growth Slowing:

  • Brazil: After publishing a sour 3Q real GDP report, Brazil’s economic activity index (a proxy for GDP) slowed incrementally in Oct to +0.7% YoY vs. +1.3% prior.
  • Colombia: Industrial production growth slowed in Oct to +5% YoY vs. +5.2% prior… retail sales growth slowed in Oct to +6.1% YoY vs. +8.1% prior.
  • Peru: Real GDP growth slowed in Oct to +5% YoY vs. +5.8% prior.

King Dollar:

  • Brazil: USD strength continues to force the hands of international policymakers; Brazil’s central bank became the latest country to [re]introduce ‘08/’09-esque measures to protect its currency and the supply of capital flowing into the country. Specifically, the program is structured as a 1-3 month repo that is intended to provide trade financing for Brazil’s exporters. A noteworthy takeaway here is that the central bank may view this as an effective maneuver in the short term to slow the pace of the real’s decline, thus opening the door for further rate cuts. Of course, the derivate of the latter action is indeed a weaker outlook for the currency.
  • Brazil: Regarding the slope of Brazilian interest rates, widespread political pressure continues to be applied to the country’s central bank operatives. President Dilma Rousseff had this to say over the weekend: “[Brazil] is ready to use monetary policy to stimulate growth amid a violent global crisis… Developed nations have interest rates close to zero. We have a room for maneuvers that they don’t.” Markets are taking her continued outlook for Brazilian interest rates seriously: 2yr sovereign debt yields, 1yr interest rate swaps, and O/N interbank rates are all trading below the official Selic rate at -54bps, -112bps, and -10bps, respectively.
  • Argentina: Financial repression, while successful at slowing the pace of capital flight, continues unabated in Argentina as the gov’t seeks to stave off a crash in the currency. To the former point, the central bank has now become a net buyer of FX reserves as insurers, energy and mining companies repatriate an estimated $2-4 billion into year-end per the government’s directive. Slowing capital flight, which fell to about $1 billion in Nov from $3 billion in Oct, and pressure from central bank president Mercedes Marco Del Pont are combining to drive down the cost of capital in the country (from a mid-Nov peak of 26.1% to 18.8% on the 30-day badlar). As mentioned, these near-term “successes” are not without consequence. Over the long term, we expect the country to experience incremental economic volatility and even higher [unofficial] rates of structural inflation as investors lose confidence in the country altogether and abandon peso-denominated assets. To that point, 1yr USD/ARS NDF contracts are currently pricing in a -20.2% crash from the spot rate over the NTM.
  • Chile: Less than a week after holding its benchmark policy rate at 5.25%, Chile’s central bank lowered its 2012 growth and inflation outlook by -50bps and -20bps, respectively, to 4.25%-4.7% and 2.7%, respectively. Their reduced expectations for both metrics paves the way, on the margin, for them to cut rates – an outcome currently being priced into Chile’s 1yr O/S interest rate swaps (trading -90bps below the policy rate).

Counterpoints:

  • Mexico: Who says you need a strong currency to empower domestic consumption? Mexico’s ANTAD same store sales growth ripped to the upside in Nov to +14.6 YoY vs. +5.8% prior, despite the peso falling -9.4% vs. the USD in the YTD through Nov. We don’t expect this divergence to sustain itself and remain the bears on the peso (vs. King Dollar) over the intermediate-term TREND. Mexico’s central bank remains divided on the next step(s) in monetary policy. This indecision is subtly bearish for the peso as heightened volatility forces investors to demand greater premiums to hold risky assets – a premium that is not being adequately provided by the central bank due to their Indefinitely Dovish interest rate policy.

Other:

  • Peru: Less than six months after winning the Peruvian presidency on the strength of strong populist support, it appears President Ollanta Humala is losing some of his left-most supporters in politics after he recently declared a state of emergency and authorized a military response to quash protests against a $4.8 billion gold mine being developed by Newmont Mining Corp. Two senior officials in his cabinet resigned after voicing support for the demonstrations; he then replaced his cabinet chief with a former military instructor. Former president Alejandro Toledo withdrew his party’s support for Humala in Congress, where Humala’s Gana Peru party only has 47 of 130 seats. Congressional gridlock and lower-highs in presidential approval appear to be in the cards for Peru and its now pro-business president over the intermediate and, potentially, long term. Ironically, it was Humala that led a violent uprising as a rebel solider just over ten years ago.
  • Venezuela: Another socialist leopard changing its spots? In an attempt to limit consumer goods supply shortages ahead of next year’s elections, Venezuelan president/dictator Hugo Chavez is forging strategic alliances with private international companies to entice them back to the country’s retail markets. This is a major reversal of his political M.O.; as recently as a few weeks ago, he authorized a dramatic piece of new legislation which would allow the government to impose draconian price caps on thousands of consumer goods. Moreover, since taking office in 1999, Chavez has seized the assets of 1,045 companies and is on the hook for roughly $30 billion in paid and unpaid international legal settlements. While we don’t expect Chavez to soon adopt Adam Smith-style capitalism, we do think this latest round of political short-termism might actually be marginally supportive for the economy struggling with structurally high rates of inflation – if he is to follow though, of course.

Darius Dale

Senior Analyst

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