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CHILE: JP Morgan Recommends Going Long 3Y Breakevens

CHILE
BulletEM BulletEmerging Market News
  • JP Morgan believes being long 3y breakevens offers more than 100bp of excess carry in a year under their inflation assumptions. They pay 3y Camara at 4.84% and receive 3y UF swaps at 1.57%, with a target spread of 3.80% and review at 2.80%. In their view, upside inflation risks in Chile are underpriced, with electricity tariff hikes, FX pass-through and high core momentum likely to put pressures on prices.
  • JPM notes that the case for outright payers is complicated by the likelihood that the BCCh delivers a few more rate cuts. They see a 25bp cut in December and two additional quarterly cuts in March and June next year, while markets are adopting a more cautious stance. Breakevens levels of around 3% present a more asymmetric risk-reward profile in their view. Notably, 2-year and 3-year inflation breakevens are only 20-30bp above their 15-year historical averages and have shown to be quite sensitive to changes in short term inflation.
  • On the FX, JPM notes that the peso's path of least resistance is likely weaker in the coming months. However, a significant repricing of tariff risks has already taken place, whereas technical factors are driving some relief in EM FX. They prefer to stay on the sidelines for the time being.
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  • JP Morgan believes being long 3y breakevens offers more than 100bp of excess carry in a year under their inflation assumptions. They pay 3y Camara at 4.84% and receive 3y UF swaps at 1.57%, with a target spread of 3.80% and review at 2.80%. In their view, upside inflation risks in Chile are underpriced, with electricity tariff hikes, FX pass-through and high core momentum likely to put pressures on prices.
  • JPM notes that the case for outright payers is complicated by the likelihood that the BCCh delivers a few more rate cuts. They see a 25bp cut in December and two additional quarterly cuts in March and June next year, while markets are adopting a more cautious stance. Breakevens levels of around 3% present a more asymmetric risk-reward profile in their view. Notably, 2-year and 3-year inflation breakevens are only 20-30bp above their 15-year historical averages and have shown to be quite sensitive to changes in short term inflation.
  • On the FX, JPM notes that the peso's path of least resistance is likely weaker in the coming months. However, a significant repricing of tariff risks has already taken place, whereas technical factors are driving some relief in EM FX. They prefer to stay on the sidelines for the time being.