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Fundamentals and Technicals Align For Chilean Peso Strength

CHILE
  • A perfect cocktail for currency strength has led to significant relative outperformance for the Chilean peso.
  • Gathering momentum in support for the far-right candidate Jose Antonio Kast in recent weeks has seen him take the lead from the left-wing candidate Gabriel Boric in final polling. Despite risks remaining associated with a likely runoff, the developments are definitely seen as more market friendly.
  • Additionally, the senate rejected a potential fourth round of pension withdrawals earlier this week which has also been viewed as a big positive, stabilising the pension funds considered the bedrock of their capital markets.
  • Add in the annual inflation rate reaching 6% on Monday, keeping further bold short term rate hikes on the table and you have ideal conditions for currency strength/a relief rally, especially given the significant sell off over the past several months.
  • USDCLP has cleared an important trendline support at 802.27, drawn from the May 10 low. The break has also established a short-term bearish price sequence of lower lows and lower highs, suggesting scope for a deeper retracement. The move lower has opened the 780.00 handle. Initial firm resistance is seen at 805.57, the 20-day EMA.
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