LATAM Update: Brazil and Mexico

With the recent stream of macro-economic news, leaving aside today's Empire State survey, has been disappointing that this has helped trigger a dramatic wave of profit-taking. Last week China reported exports are still falling and today it reported that direct investment inflows extend their decline into the tenth consecutive month. Japan's Apr-June GDP missed expectations. Last week, the US reported a disappointing retail sales report.

The Brazilian reai, which is easily the best performing major currency this year, gaining almost 25% in this year through Friday against, is being hit with a wave of profit-taking today. Its 1.5% decline though is a bit less than this year's other top performers, include the antipodeans, scandi-bloc and sterling. The profit-taking on the currency appears to be reflecting the profit-taking that is weighing local shares, which itself seems to largely be a reflection of the drop in commodities. Even Petrobras, which appeared to exceed earning expectations, is off almost 4% today. Today looks to be the largest drop in the Bovespa since early this year.

The reai is at its lowest level here in August and the dollar is trading above its 20-day moving average for the first time since mid-July. The near-term risk extends toward BRL1.90. A move above BRL1.91 could spur a further dollar advance toward BRL1.95.

The Mexican peso is also under pressure today as risk-trades are unwound. Despite the peso's 1.15% loss against the dollar today, it remains the best performing major currency against the dollar thus far this month. Several large investment houses have recommended long peso positions to benefit from the healthier appetite for risk or as a way to play the recovery in the US auto sector. We have been more skeptical of the peso and Mexican macro fundamentals. These fundamentals doubts will find support in this week's data, and especially the Q2 GDP figures that are due out later in the week. After an 8.2% annualized contraction in Q1, the consensus expects that the Mexican economy contracted by 10.7% in Q2, while most countries have reported a slowing pace of contraction (US and UK) if not outright expansion (Germany, France and Japan). At the end of the week the central bank meets and is widely expected to leave rates steady at 4.5%. A surprise rate cut would likely be seen as peso negative.

Mexico's Cemex, the largest cement make in the Americas announced a new debt agreement that will extend maturities on about $15 bln of debt for five years. The details appeared to be in line with market expectations. Shareholders will vote on the plan on Sept 4th, according to news wire accounts. The stock is marginally lower today, but holding up better than the Bolsa.

Mexico's weekend decision to replace border guards as the government steps up its anti-corruption campaign is a favorable development, however. The dollar held its 20-day moving average against the peso (~MXN13.10) earlier today and unless this level is convincingly taken out, look for a consolidative phase to emerge.