Hi there,

In today's update, oil prices are projected to end the year close to their initial levels, buoyed by OPEC+ support, increased shale production, and consistent demand. Additionally, key economic data from countries like Brazil, Chile, and Peru will be released this week and likely to impact FX markets. Lastly, China's evolving economic approach may intensify trade tensions globally, particularly with developed countries and emerging economies striving for industrial progress.

Matheus Zani & Daniel Porto

R&D Featured Article

How to manage liquidity risk in MTM settlements

Navigating the intricacies of hedging strategies is akin to a delicate balancing act, where asset values and hedges are in constant flux. Recent market dynamics, with robust emerging market currencies against a weaker dollar, underscore the challenges faced by General Partners (GPs) in funding deep out-of-the-money hedges during volatile times. One significant hurdle lies in the prioritization of "deal-related" obligations over hedging costs, especially in mark-to-market (MTM) settlements. To address this, a proactive approach is essential, focusing on performance, liquidity risk, and cost of hedging analysis. By integrating a comprehensive liquidity strategy, GPs can minimize risk, optimize cash flow, and secure credit resources at competitive rates, ensuring resilience in the face of market fluctuations and MTM liquidity challenges.

2. LATAM Week Ahead

In Brazil, December's CPI is expected to reveal that inflation ended 2023 within the targeted range, a shift from the misses in 2021 and 2022.

Meanwhile, in Argentina, a significant CPI increase in December will highlight the repercussions of the early currency devaluation during President Javier Milei's tenure.

Mexico is anticipating another uptick in December's inflation, primarily driven by non-core prices and base effects. Nevertheless, this aligns with both central bank projections and market analysts’ forecast of a downward price trend in 2024, with concerns about consistent core services inflation.

In Chile, December's inflation is projected to continue its decline, influenced by diminishing pandemic and Ukraine war shocks, alongside weakened domestic demand and subdued inflation expectations.

Colombia likely experienced a slower inflation rate in December, remaining above the 3% target due to base effects and subdued domestic demand, indicating potential for further moderation.

Finally, in Peru, the market anticipates another 25-basis-point interest rate cut by the central bank, given tight monetary conditions, declining inflation, and growing economic slack, supporting our forecast for more cuts this year.

3. China's Economic Pivot: A Shift Towards Domestic Demand and Sustainability

China is undergoing a significant economic shift, as highlighted by Zhu Min, a former deputy governor of the People’s Bank of China. He stated in a November speech that China's growth model is transitioning from being driven by "investment, housing, and exports" to one centered on "domestic demand, manufacturing, and carbon neutrality." This marks a profound long-term structural change. However, the transition poses challenges. According to economists at Goldman Sachs Group Inc., including Maggie Wei, the rapid advancement in the "new three" industries may not fully compensate for a decline in real estate and the dwindling production of gas-powered cars.

They anticipate this could reduce annual economic growth by 0.5 percentage points from 2023-2027 and negatively impact urban employment. This evolution in China's economic strategy could also exacerbate global trade tensions, especially with developed nations and emerging economies aspiring for industrial advancement.

Charted Territory

What to look out for today

EUR - Consumer Inflation Expectation
EUR - Retail Sales (Nov)
USD - NY Fed 1-Year Consumer Inflation Expectations
JPY - Tokyo CPI (Dec)

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