LatAm Daily Update

Brazil (+)

The Brazilian real rallied almost 2.5% vs. the USD on Wednesday and is opening today with a slight positive tone. A combination of a better EM sentiment for high yielding currencies when added to a better political tone in austerity negotiations in congress propelled the BRL to a strong performance. In addition, while inflation (IPCA-CPI) showed a slightly lower than expected acceleration during March, the overall persistently high inflation levels still point to the continuation of the tightening cycle possibly beyond 13% in the coming months – thus making short BRL positions an expensive value proposition.
So far, the central bank has not been in the market with any additional measures regarding FX since the last days of March that marked the end of the FX swaps program. Given the good performance of the BRL in recent weeks, we would expect that the central bank slowly chooses to rollover partial amounts of the FX swaps coming due, an action that would be compatible with the central bank communications surrounding the end of the program.

Mexico (=)

Inflation in Mexico was higher than expected during March as the CPI posted a 3.14% YoY reading when a number around 3.05% YoY was expected. In comparison, in March of last year, inflation stood at 3.76% YoY. In spite of the slightly higher headline, core inflation is still well tamed at 2.45% YoY well below Banxico’s 3% target value. It’s worth mentioning that within the core reading, merchandise prices accelerated 0.15% MoM while services posted a more pronounced move of 0.36% MoM suggesting that domestic demand should be slowly gaining traction. Looking at the complete set of subcategories, “other services” continues to be under pressure posting an increase of 0.65% MoM, the highest reading within core components suggesting that food related services and healthcare items (small restaurant, doctor’s visit) and other non-tradable items are being the main inflationary sources.
All in, while inflation was slightly above expectations, the annual prints are still within very manageable levels and should remain so, particularly as the peso has gained ground vs. the USD. In the following months, we expect domestic demand to continue strengthening and thus we are likely to start seeing the first signs of demand-side pressures.

Chile (=)

Inflation for March was slightly below expectations posting 4.2% YoY when consensus was positioned for a number around 4.4% YoY. Core numbers were also subdued at 0.5% MoM. Tradable items showed a 0.5% MoM advance during March while non-tradable items showed a 0.8% MoM reading.
So far in 2015, Chile has accumulated a price acceleration of 1.1%. The report breakdown shows that education (non-tradable) continues to be one of the culprits, behind inflation, and is now posting numbers above the inflation target itself at 5.1% MoM. Pretty much this last category surpassed any other subcategory with apparel and shoes following at 0.7% MoM and then household items posting a 0.6% MoM acceleration during March. All in, Chile’s inflation is still misaligned to the 2%-4% target range and has prompted hawkish language in the central bank communications in past months suggesting that in spite of still slow economic activity, the central bank is not likely to deliver a rate cut anytime soon.