The central bank announced new measures, including a 500-bp rate hike in an inter-meeting decision, as asset prices in Argentina remained under stress, influenced by the Turkish crisis. The policy rate (the 7-day Leliq, a bill issued by the monetary authority) is now at 45%. In the brief press statement announcing the decision, the central bank pledged not to cut the policy rate until at least October.
Authorities also announced a suspension of its USD 50 million daily auctions (resources lent by the IMF to finance the government budget deficit), but later announced a USD 500 million auction for Tuesday. According to the treasury, daily auctions were suspended because the government does not need pesos at this point, but could be later resumed if necessary.
In our view, recent measures will only be sufficient to stabilize the peso and other asset prices if strains on external financial markets diminish. In fact, yields of Lebacs have already been seen trading above 45% over the past few days, so the policy rate at 45% does not signify a meaningful “de facto” tightening of policy. Furthermore, we note that the ability of the central bank to intervene in the exchange rate market (both future and spot) faces constraints from the IMF, meaning the central bank’s firepower for intervention is limited.
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The BCB released its weekly survey with market participants. According to the Focus survey, IPCA inflation expectations increased to 4.15% for 2018 (from 4.11), and remained stable at 4.10% for 2019, 4.00% for 2020 and 3.93 for 2021. GDP growth expectations slightly decreased to 1.49% for 2018 (from 1.50) and remained stable at 2.50% for 2019 and 2020. Median forecasts for the exchange rate did not change for 2018 and 2019 (both at BRL 3.70/USD), and slightly appreciated to BRL 3.67/USD for 2020 (from 3.69). Year-end Selic rate remained stable for the three years horizon (2018-2020): 6.50% for 2018 and 8.00% for 2019 and 2020.
Tomorrow’s Agenda: June’s Service Sector Survey (PMS) will be released at 9:00 AM (SP Time). We forecast a 0.6% yoy decline (consensus: -0.4%). A Parana Pesquisas poll of voting intentions is expected to be released tomorrow.
Tomorrow’s Agenda: Activity indicators for the month of June will be published at 12:00 PM (SP Time). We expect June’s industrial production to increase 1.5% year over year (consensus: 2.0%), leading to growth of 4.5% in 2Q18. Meanwhile, retail sales likely gained 4.7% in twelve months (consensus: 4.60%), resulting in growth of 5.7% in 2Q18. Additionally, think-tank Fedesarrollo will release the July consumer confidence. We believe that real wage growth improvement amid low inflation and expansionary monetary policy will help maintain a positive consumer outlook.
FX and Capital Markets: International environment pressures EM FX markets. The crisis in the Turkish economy escalated after President Donald Trump announced that the U.S. will double tariffs on steel and aluminum imports from the Eurasian country. The dollar reached its strongest level ever against the Turkish lira and the move triggered aversion to emerging market assets. In Brazil, the exchange rate closed the week at 3.86 BRL/USD, depreciating 4.1% and underperforming its peers. Last week, the monetary authority did not offer additional FX swap contracts or carry out line auctions, and rather just carried out the rollover of contracts expiring in September. Its stock of FX swaps now stands at $67 billion.
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Weekly Fixed Income LatAm Strategy: Depreciation in EM currencies creates opportunities. Emerging-market currencies continue to depreciate against the USD early this week, after a strong sell-off on Friday as Turkish markets suffered heavy losses. The sell-off is a good reminder that outright receivers in high-beta LatAm rates are risky in this environment, but the volatility also creates some opportunities. In Brazil, for example, the local yield curve is again pricing in a 25bps rate hike in the next Copom meeting.
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