- Peru: Forecast update: we see USDPEN around 3.75 in 2024, unchanged
Markets are trading with a mostly positive risk mood supported by lower US yields, a RRR cut by the PBoC, and mixed PMIs out of the Eurozone (weaker) and the UK (stronger). Chinese authorities followed last week’s somewhat disappointing rate hold with a RRR reduction today that they claim will free up CNY 1tn (~USD140bn) in liquidity to support sluggish economic growth. Global markets await the release of US PMIs at 9.45UK, at the same time as the BoC’s decision where no change is expected but hawkish guidance should be maintained.
The PBoC’s move helped a rally in domestic shares and lifted global equity indices and futures (up ~0.5% in SPX contracts) , and metal prices (iron ore up ~2.5%) while crude oil is little changed. US and European rates are bid (bull flattening and evenly richer, respectively) against a selloff in the UK (bear flattening). The USD is losing ground against practically all major FX, where the MXN is on track for a 0.4/5% rise that has the cross trading around its same levels 24hrs ago, ~17.25 after a 17.39 peak on Tuesday that again knocked on the 200-day MA.
A couple of key domestic data releases await in Mexico today at 7ET, H1-Jan CPI and Nov IGAE. This will be the first inflation print of 2024 of the countries that we cover, though economists don’t expect much of a deceleration; the Bloomberg median projects headline and core inflation year-on-year to only slow by about 0.1 to 0.2ppts. INEGI’s early economic indicator tees up a 3.1% y/y rise in output (as does the economist median) that if translated into today’s IGAE data would represent the slowest pace of year-on-year growth in Mexico since April’s 1.7% rise, with primary and secondary sectors expected to be behind the deceleration.
Chile’s December PPI data at 7ET may provide some colour into the big miss in inflation for that month (3.9% vs 4.4% median) as well as what may await for prices growth. More importantly, however, will be the vote in the Chamber of Deputies of the government’s pension reform plan. Debate on the proposal yesterday delivered no clear signal on how the Democrats may vote as the government needs only one of their votes to succeed today (in practice, counting the coalition in support of the bill that the government has built). Debate in the lower house resumes at 8ET. Even if the bill were to succeed in the lower house it faces tougher resistance in the Senate from right-wing policymakers.
—Juan Manuel Herrera
PERU: FORECAST UPDATE: WE SEE USDPEN AROUND 3.75 IN 2024, UNCHANGED
We expect USDPEN to flucutuate around 3.75 for this year, in a wide range between 3.69 and 3.81. This level is what we had expected since August of last year. The review of the determining factors of the FX rate converges again towards that level. Our forecast is below the market consensus, which points to 3.78 according to the Focus Economics survey and 3.79 according to the BCRP survey.
For 2023, the FX rate posted 3.71 at year-end, with a median value during the year of 3.75. However, throughout the year it registered extreme values between 3.56 and 3.90. FX volatility was exacerbated in 2020 due to the pandemic and reached its greatest extent in 2021 due to political uncertainty. It has been reducing since then but has not yet reached pre-pandemic amplitudes. Therefore, assuming an average amplitude of the last 10 years (2013–2023) and isolating extreme values (2017 and 2021), we forecast a range for 2024 between 3.69 and 3.81. Our analysis considers a set of variables with which the FX rate is correlated. The first of them is the USD, measured by the DXY index. Scotiabank foresees a USD weakening throughout 2024, in line with expectations of an economic slowdown expected for the US (GDP growth would go from 2.4% in 2023 to 1.3% in 2024), and with a lower bond yield of the 10-year Treasury (which would go from an average of 3.97% in 2023 to 3.80% in 2024). This biases the behaviour of the FX rate downwards.
Metal prices also influence this. We see the price of gold with a bullish technical figure, with significant supports at US$ 2,000 per ounce. The USD weakness would provide support for the maintenance/rise of metal prices. The expected prices of copper and, mainly, gold would contribute to the stability of the FX rate.
Scotiabank’s forecast on the region’s currencies, such as the Brazilian real (USDBRL), the Mexican peso (USDMXN), the Chilean peso (USDCLP) and the Colombian peso (USDCOP), see Scotiabank’s Forecast Tables, show that together they would also contribute to the stability of the FX rate. This variable, which reflects the risk appetite of investors for Latam’s currencies, has been one of the most influential in the performance of the FX rate in recent times.
The country risk perception, reflected in the EMBIG index and in the CDS price (Credit Default Swap), also influences the FX rate, although to a lesser extent. Although in general terms Peru’s fiscal situation looks more comfortable than its peers in the region, recent pressures on the fiscal result—with a fiscal deficit of 2.8% of GDP in 2023, higher than the official goal of 2.4%, contingent liabilities—such as that linked to PetroPerú and the negative outlook on the credit rating of rating agencies—associated with weak institutionality and persistent political uncertainty—make an improvement in risk perception unlikely during 2024. A downgrade would materialize this risk with an upward FX rate.
The interest rate differential between soles and dollars is also a factor that usually puts pressure on the FX rate. We forecast a sustained decline in interest rates in soles, influenced by monetary policy (see Latam Daily), and some stability in yields in dollars, mainly on the 10-year US Treasury bond, which would be below 4% on average. This would be reflected in a new reduction in the interest rate differential that would give an upward bias to the FX rate.
One of the main FX fundamentals is the trade balance, which has been in surplus for the last eight years. Furthermore, during 2023 a record surplus of around US$ 16 billion would have been obtained. This fundamental should pressure the FX rate downwards in the medium term. However, the relationship between trade flows and FX market flows has been dissociated since the beginning of 2021, due to political uncertainty that caused a record capital flight in Peru. Dollars for trade flows that previously entered the FX market are now parked in offshore accounts, reflecting caution among economic agents due to persistent political uncertainty. Since then, trade flows no longer influence the performance of the short-term FX rate as much. We believe this is one of the reasons why the level of the FX rate is not lower.
In the past, the FX rate has had an upward behaviour during El Niño episodes of moderate and strong intensity. However, the most recent readings show that El Niño is weakening, so the pattern of a rising FX rate is reducing its probability. Our FX rate forecast now assumes a weak El Niño scenario, so the expected hiccup in 2024-1Q is now less likely.
—Mario Guerrero
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