Forex Investment and Currency Trading

Brazil: The weekly central bank survey showed inflation expectations adjusted upward once again with IPCA expected to end the year at 6.40% (from 6.31% previously) and end 2009 at 5.20% from 5.06% previously. Surveyed economists expect COPOM to remain on hold at the December 10 meeting and cut rates by 50bp in 2009.

Inflation measures released last week mostly showed higher monthly rates of inflation than their previous print due in large part to the end of food deflation seen in previous weeks. However on an annual basis, inflation is meaningfully lower than 2Q and 3Q and the central bank is likely done with its rate hike cycle. Market expects 100bp in cuts in the Selic rate in 2009.

Mexico: The worsening of the crisis in the US is now unavoidably having an effect on the Mexican economy and GDP growth prospects for 2009. The effects of the US slowdown in Mexico’s economic activity have now become evident in 3Q 2008 figures and seem likely to extend deep into 2009. Recent data has shown a broad-based deceleration affecting the manufacturing, mining and construction sectors. In coming months the crisis in the US is likely to impact the Mexican economy through three main channels: substantial lower growth for Mexico’s manufacturing exports, diminished remittances flows and the lower revenues for the public sector. In addition to these negative impacts, credit restrictions faced by economic agents will unavoidably constrain domestic spending, leading to lower GDP growth prospects for Mexico. Market is expecting Mexican GDP to grow 2.1% in 2008 and barely 0.8% in 2009, a figure one percentage point below the already downwardly revised official growth estimate for 2009 (1.8%).

Considering this deteriorating outlook, there are two key aspects to focus on going forward. The first one is that, in addition to potentially lower international oil prices—the Mexican government estimated revenues budgeting a $70bbl average price for the Mexican crude mix in 2009—which according to the Ministry of Finance were hedged, a substantial slowdown in Mexico’s GDP growth would unavoidably cause a shortfall in non-oil tax revenues, that could eventually affect the government’s plan to implement a counter-cyclical fiscal policy. The second aspect is that this deteriorating economic outlook has led to a gradual but noticeable shift in the central bank’s balance of risks assessment which in turn reaffirms expectation to see the beginning of a series of rate cuts in 1Q 2009.