Forex Investment and Currency Trading

Brazil: The weekly central bank survey of market expectations showed a few minor changes in inflation expectations with virtually no shift in the view that inflation will likely remain at relatively elevated levels. Expectations for annual IPCA inflation in 12 months (4.29% from 4.25%) and end of 2008 (4.44% from 4.42%) both edged up slightly. IGP-DI inflation expectations (mostly reflective of wholesale prices) were up to 5.20% from 5.19%, but on a 12-month horizon actually dropped for a fourth straight week to 4.59% from 4.65%.

Economist surveyed continue to expect the Selic unchanged in April, despite last week’s more hawkish than expected COPOM minutes.

The weekly trade balance bounced back to $527mn from a very weak -$159mn the prior week. The 12-week average remains on a declining trend, but we think this has to do with the fact that the trade balance tends to trough in March and peak in September and we would expect a recovery in the near-term. The falling trade surplus and increasing net outflow of services payments should keep the current account in deficit through 2008. With net payments in the $3.0 bn per month range in 2007 to the $3.5-$4.0 bn range in 2008, the current account deficit could reach the forecast $14.3 bn this year.

Mexico: Industrial production in January grew 3.1% yoy, greater than expectations of 1.3% yoy. The strongest performers were utilities (5.0% yoy) and manufacturing (3.7% yoy). We continue to expect Mexico’s GDP to expand at a modest pace of 2.6% in 2008.

The expected deceleration in US industrial production will take its toll on Mexican manufacturing activity, therefore acting as a drag on Mexico’s overall growth. However, this time the Mexican economy seems to be better prepared to weather an unfavorable US scenario. Additional resources coming from the approved fiscal reform and high international oil prices will allow the Mexican government to implement a counter-cyclical fiscal policy. Thus, increased government spending on infrastructure projects throughout 2008 should boost the Mexican economy and partially offset the negative effects of a US slowdown.