Argentine peso depreciation triggers change in central bank’s command


Luis Caputo, former minister of finance, was appointed governor of the central bank after Federico Sturzenegger’s resignation. The change took place just few days after Argentina reached an agreement with the IMF for a USD 50 billion credit line. Caputo is now responsible for reducing inflation to 22% by June 2019 and to 17% for December 2019 amid weakening peso and higher inflation expectations (27.1% for 2018 according to the latest central bank survey). New appointments of board members are expected. Minister Dujovne will now become the head of treasury and finance, thus incorporating Luis Caputo’s former responsibilities.

Continued weakening of the ARS will likely keep inflation at a high level. The ARS depreciated by an additional 11% (50% YTD) since the announcement of the agreement with the IMF for a USD 50 billion credit line and threatens the intermediate targets for June 2018 (27%) and June 2019 (22%). As the IMF package strongly limits central bank’s intervention in the exchange rate market (through spot or future), we believe that another hike in the monetary policy rate (currently at 40%) at the upcoming monetary policy meeting, or even before, is very likely.  In this environment, we see upside risk to our 26.5% inflation forecast for this year. ** Full Story here.

The increase in consumer prices in May came below expectations. CPI rose 2.1% from April to May, below the Bloomberg market consensus forecast of 2.5% and the 2.7% reported in the previous month. The relatively low headline inflation was favored by regulated prices, which increased by only 0.4% MoM. Energy tariffs declined slightly due to the exemption of gross revenue taxes for distribution companies. The 12-month inflation increased to 26.3%, from 25.5% in the previous month. Core item prices increased by 2.7% MoM (up from 2.1% in April), led by the 3.3% increase in food items between April and May due to a weaker ARS. The annual reading was 23.6%, while the annualized three-month measure increased to 34% (from 30.8% in April and 27.6% in March).


The Central Bank announced that it sees no restriction to offer a stock of FX swaps that considerably exceeds previous record levels (around US$ 115 billion). In the statement, the central bank also reaffirmed the intention to offer a total of US$ 24.5 billion in FX swaps between June 8th and 15th, and declared it estimates to offer an additional US$ 10 billion in FX swaps in the coming week, an amount that can be adjusted upward or downward, depending on market conditions. Yesterday, the Central Bank implemented an additional FX swap auction of up to 100,000 contracts (USD 5.0 billion). The currency finished the day valued at BRL 3.80/USD. At the same time, the National Treasury announced further intervention in the fixed income market, and the National Monetary Council changed rules regarding pension funds’ participation, all aimed at improving liquidity and reducing volatility in the rates market.

According to the IBGE’s monthly services survey (PMS), services sector real revenue increased 1.0% mom/sa in April, the first positive reading in 2018. The breakdown shows mom/sa gains in 7 out of 12 sectors, so the diffusion of activities was consistent with the headline. The strong headline is due to additional working days than the usual for the month. In yoy terms, service sector real revenue increased 2.2%, above consensus (1.4%) and slightly above our forecasts (2.0%). It is worth mentioning that the survey encompasses approximately 34% of the services GDP, so it should not be seen as an indicator for the whole services sector.

Itaú Unibanco monthly GDP expands 0.6% in April. Itaú Unibanco’s monthly GDP (PM-Itaú) rose 0.6% mom/sa in April. In the quarter ended in April, our indicator expanded 0.8% qoq/sa vs. the quarter ended in January. Compared to April 2017, the indicator grew 4.3%, a strong reading because April 2018 had an unusually-high number of working days. For May, based on already released coincident indicators, we forecast, for the time being, a 2.1% drop in PM-Itaú, already incorporating the impact of cargo transportation stoppages.

Day Ahead: The Central Bank will release April’s Monthly Activity Index (IBC-Br) at 8:30 AM (SP Time). We and the consensus forecast an 0.6% mom increase. If our forecast is correct, the activity index will expand 3.9% yoy (consensus: 3.80%).


The central bank’s second inflation report (IPoM) for 2018 shows stable rates are set to persist for most of 2H18 before a normalization process starts at yearend. Since March’s edition, downside risks to inflation have moderated, activity recovery has consolidated and global impulse will be somewhat smaller (due to tighter financial conditions as the Fed confirms its normalization trajectory and inferior terms-of-trade on the back of higher oil prices). Overall, the board’s baseline scenario sees rates evolving in line with the results from the June 7 trader survey: steady at 2.5% for the next three meetings (four months) with a hike in the fourth meeting (December) to 2.75%. This is broadly similar to what asset prices infer, while coming slightly ahead of both the analyst survey and our expectation of the first hike coming in 1Q19. Stable rates for the time-being are deemed appropriate given the still wide output gap and core inflation that is still set to remain below the 3% target (partly due to extensive indexation mechanisms).

Inflation has surprised the central bank to the upside. Yearend inflation is now seen at 2.8% (from 2.3% in March), following higher oil prices and the weaker Chilean peso. Average inflation for this year was raised to 2.4% from 2.1%. Meanwhile, the 2019 yearend forecast is stable at the 3.0% target, but the year average was lifted to 3.0% from 2.7% previously. On the other hand, core inflation has stayed low, but the yearend forecast was still raised 0.2pp to 2.3% and still seen at 3% by the end of next year. This is partly explained by the additional weakening of the real exchange rate and a (somewhat faster) narrowing of the output gap.

The odds that the central bank will start a tightening cycle by the end of this year are rising. Strong growth and lower risks for inflation convergence to the target (also a result of the adverse environment for emerging market currencies and high oil prices), would justify an earlier beginning of the tightening cycle compared to our expectations.  Consistent with this, the statement of the recent June monetary policy decision also contained a slightly more hawkish forward guidance. Still, the inflation outlook remains sufficiently benign to allow any hiking cycle to be gradual. ** Full Story here.


Scenario Review: Expecting slower growth. A more adverse international scenario for emerging countries and the reduction of growth forecasts for Brazil and Argentina would likely affect Uruguay. We adjusted our GDP growth forecasts to 2.5% this year and next, down from 3% in our previous scenario. The UYU weakened in May, following the trend observed in neighboring countries. We revised our YE18 exchange rate forecast to UYU/USD 31.7 (UYU/USD 31.5 previously). Inflation accelerated due to the depreciation of UYU, and the annual reading is now above the upper bound of the BCU’s target range. We maintain our YE18 inflation forecast at 7.3%. ** Full Story here.


Scenario Review: The central bank curbs currency depreciation. The central bank in Paraguay intervened in the currency exchange market to curb the depreciation of the PYG against the USD in May. We maintain our YE18 and YE19 exchange rate forecasts at PYG/USD 5.800 and PYG/USD 6.000, respectively. We expect inflation at 4% this year and in 2019, and we do not foresee changes in the monetary policy rate. We maintain our GDP growth forecast at 4% for YE18 and YE19 based on our expectations for a good soy crop despite the slower economic growth projected for the region. ** Full Story here.


Day Ahead: The statistics institute (INEI) will announce April’s GDP proxy. Based on coincident data, we estimate that the GDP proxy grew 7.2% year-over-year in April (consensus: 6.2%). On the same day, INEI will publish May’s unemployment rate. We expect the unemployment rate to come in at 7% (consensus: 7.1%).


Day Ahead: Activity indicators for the month of April will be published at 12:00 PM (SP Time). We expect industrial production to increase 7.0% year over year (consensus: 5.6). Meanwhile, retail sales likely gained 4.5% in twelve months (consensus: 6.7%).

Fuente: ITAU

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