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Deutsche Bank Recommending 1s3s Steepener

CHILE
  • While Deutsche Bank see continued space to loosen monetary conditions, they expect BCCh will follow a more cautious approach to policy normalization going forward. DB now expect the policy rate to follow a more gradual and shorter path, finishing this year at 8.5% and next year at 5% (vs 8% and 4% before).
  • Deutsche recommended to stay long CLP vs. PEN a couple of weeks ago on the view that monetary and FX policies in Chile had become inconsistent – internally and vs. the deteriorating external environment.
  • On fixed income, DB expect moderate repricing of the front end. First, the market was already adjusting to a more cautious pace of easing. Second, the changes in FX intervention and possible rally will tame recent inflation shocks. Third, inflation and inflation expectations had converged to the target, as the economy had weakened significantly with no prospect of a V-shaped recovery.
  • DB are commending 1s3s steepener and see room for further repricing in monetary premium – but small. The FX overshooting was a reminder that the leeway for BCCh to cut rates is lower than it used to be that the belly of the curve failed to price by mid-year, but the slope is closer to fair now, in their view. On duration, DB find Chile’s real and nominal yields too low in absolute terms and vs. the US.
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