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Barclays Say Peso Underperformance Seems Overdone

CHILE
  • Barclays think the CLP underperformance seems overdone. Fundamentals have adjusted since last year, and Chile no longer needs emergency rates. In a world of high US rates, carry erosion matters and CLP weakness reflects concern about the BCCh's ability to cut through the US and the currency being the funder of choice in LatAm.
  • Fiscal and political concerns have softened. Last year's CLP depreciation was partly attributed to the possibility of Chile leaning towards its more politically extreme LatAm peers and its fiscal implications. Those risks have stabilized, in Barclays’ view.
  • Chile is a useful example of what happens when carry erodes faster than the rest. Inevitably, Barclays think the currency will influence the BCCh's reaction function. If all central banks normalize rates quickly, and carry erodes across EM, then the CLP will be in a better position. But today it's all relative.
  • Barclays think currency weakness may warrant a slower normalization, especially with other EM central banks increasingly giving the Fed a bigger weight in their reaction functions. Ultimately, fundamental adjustments are proving not to be enough for now, as these variables would suggest the move is overdone.
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