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Goldman Sachs: China Reopening More Friendly For CLP & PEN Than COP

LATAM FX
  • As news around China reopening has accelerated, CLP (and, to a lesser extent, PEN) have outperformed most major currencies on a spot basis, while COP has seen spot losses versus the Dollar.
  • Some of this reflects idiosyncratic factors, which may continue to drive FX moves in coming days: in Peru, most notably, the Sol is likely to remain subject to domestic volatility, given that the political backdrop is likely to remain unstable, and the policy direction of the new administration isn’t yet clear after Castillo’s removal from office.
  • Much of the differentiation across Andean FX, however, reflects global factors, and in particular the ‘copper up, oil down’ price action we’ve seen as signs of China’s reopening has progressed.
  • Going forward, Goldman Sachs expect China’s reopening to be a bumpy one, judging by the experiences of Hong Kong and Taiwan, but as investors increasingly price the medium-run effects of an eventual easing of covid restrictions, it is worth remembering that i) China’s share of global demand is far larger for copper than for oil, ii) China’s easing of covid measures are coming alongside other measures that could provide some much-needed and copper-friendly relief to China’s property market, iii) after absorbing significant negative news in 2022, limited capacity for mining expansions may limit copper supply, and iv) copper prices may be quicker to price in positive news on China reopening than oil prices.
  • As previously flagged, GS think left tail risks are higher for COP than for CLP or PEN; while they will continue to monitor risks—including any speedbumps to a continued disinflationary path in Chile, or further political volatility in Peru—price action in the past few weeks suggests that an extension of positive sentiment around China reopening could continue to support this relative view within the Andeans.
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