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CHILE: Deutsche Bank Sees One BCCh Cut This Year, Likely In Q3

CHILE
BulletEM BulletEmerging Market News
  • In Deutsche Bank’s view, the removal of BCCh’s easing bias signals a potentially extended pause that could last at least the first half of the year, consistent with market pricing. Given the mature stage of the normalisation cycle, lingering concerns over the short-term inflation outlook, cyclical position of the economy and a more troubling external backdrop, they still expect BCCh to validate its revamped forward guidance. Accordingly, DB still sees just one rate cut this year, likely in Q3.
  • On rates, DB believes that Chile’s curve prices too high a neutral rate. Meanwhile, risks for policy adjustments are now two-sided, and there is likely to be more premium building in the curve. Premium is particularly low in longer tenors, where positioning could play a bigger role. Once the currency stabilises, possibly only with more clarity on US policies and stabilisation in China, DB believes BCCh could turn more dovish again. Overall, DB prefers to stay neutral and look for more premium to re-enter receivers in short-tenors (vs. US).
  • On the FX, BCCh’s hawkish tilt should limit CLP funding, but the peso is exposed to copper and oil prices. On balance, CLP is fair vs. these drivers, but extreme positioning and valuations (both fundamental and financial) combined with the hawkish tilt favour some unwinding of CLP shorts, thus supporting downside in EUR/CLP.
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  • In Deutsche Bank’s view, the removal of BCCh’s easing bias signals a potentially extended pause that could last at least the first half of the year, consistent with market pricing. Given the mature stage of the normalisation cycle, lingering concerns over the short-term inflation outlook, cyclical position of the economy and a more troubling external backdrop, they still expect BCCh to validate its revamped forward guidance. Accordingly, DB still sees just one rate cut this year, likely in Q3.
  • On rates, DB believes that Chile’s curve prices too high a neutral rate. Meanwhile, risks for policy adjustments are now two-sided, and there is likely to be more premium building in the curve. Premium is particularly low in longer tenors, where positioning could play a bigger role. Once the currency stabilises, possibly only with more clarity on US policies and stabilisation in China, DB believes BCCh could turn more dovish again. Overall, DB prefers to stay neutral and look for more premium to re-enter receivers in short-tenors (vs. US).
  • On the FX, BCCh’s hawkish tilt should limit CLP funding, but the peso is exposed to copper and oil prices. On balance, CLP is fair vs. these drivers, but extreme positioning and valuations (both fundamental and financial) combined with the hawkish tilt favour some unwinding of CLP shorts, thus supporting downside in EUR/CLP.