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Citi on Runoff Election This Weekend: Like Buying USDCLP On Dips

CHILE
  • Citi Economics flagged that the gap between Kast (27.9%) and Boric (25.8%) was just over 2% in the first round, the narrowest since the election of 1999, and uncertainty remains high heading into the second round. Their economists note that, in the post-Pinochet era, the front-runner in the first round has always won the runoff.
  • The final poll from Atlas Intel showed Kast and Boric tied at 50% each, whereas most prior polls showed Boric in the lead. Cadem’s final survey suggested that the gap between candidates was narrowing.
  • Markets are trading on many more risk events now than they were heading into the first round. Combined with yearend dynamics, they will continue to see tactical and structural volatility.
  • Alongside the high political and institutional uncertainty around Chile’s constitution, local markets will trade on hawkish policies from major central banks, risk reduction into year end, developments around Omicron, and concerns of regional slowdown
  • Even though Kast is considered a market-friendly candidate, their local rates trader notes that his platform could lead to protests across Chile – if he wins by a tight margin. Citi believe that Kast must secure more than 55% of votes to reduce volatility in rates. If Boric gains more than 55% of the votes, markets could expect a decisive sell-off, though it looks like markets have already discounted a Boric win.
  • Citi’s FX team like to buy USDCLP on dips as the peso should continue weakening over the medium-term horizon. In addition to uncertainty around the new constitution, the makeup of the new President’s cabinet will be minded by FX. In the short-term, they expect FX to strengthen if Kast wins. A Boric win should see a move towards 900 over the medium-term horizon, while a Kast victory buy provide an opportunity to get long at 800.
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