LatAm Daily Update

Mexico (=)

The central bank of Mexico (Banxico) released the minutes from its last rate setting meeting where they kept the O/N rate unchanged at 3.0%. The tone of the minutes however sounds slightly more dovish than the language used in the brief communiqué that accompanied the rate decision two weeks ago. In spite of this, we believe that, from an action perspective, Banxico should however not be undertaking any monetary action in the foreseeable future and before the US Fed starts withdrawing stimulus.
While Banxico’s mixing of dovish comments on the economy (see comment on output gap) coexist in the same document with potential rate hikes around the US Fed lift-off, the only way to reconcile these views is to analyze the potential implications of how a weaker peso resulting from volatility around the lift-off, could end-up affecting inflation or inflation expectations.
It was interesting to see a few lines on Banxico’s estimates of the output gap. While this view has not changed, the output gap should close at some point in late 2016. By then, according to Banxico’s estimates and in line with our own, Mexico should be growing at around 3.5%.
Finally, the board continues to discuss the timing for an eventual rate hike. Here, the majority of the board seems to agree on a “reactive” action to the US Fed. There was a member of the board who continues to discuss a potential “pre-emptive” rate hike and how this action could help cement long-term inflation trajectories. We think that (the majority of) the board still leans towards keeping the option to act after the US Fed does.
All in, we see no major changes in the potential timing to deliver a rate hike but see a dovish tone in how Banxico sees the evolution and expected evolution of the Mexican economy. In spite of this, we think that the room for a rate cut is basically non-existent given the potential implications it could have on the MXN (weaker).



Brazil (+)

The central bank of Brazil is slowly dismantling the FX swaps program that has been in place for the last two years. The central Bank continues to slowly reduce the amount of hedging that it provides to the market. Two weeks ago, the central Bank was providing on average a daily $350 mn in FX hedge that was later reduced to $315 mn and now being at $260 mn.
We think that this strategy is the right way to go for the central bank given the large stock of FX swaps that at its peak accounted for around the equivalent of over $110 bn. In the short term, the high cost of carry and the positive momentum of the fiscal austerity measures should provide a cushion for the BRL however; our view continues to be that Brazil needs a weaker BRL in order to help close the imbalances in external accounts.