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Goldman Sachs: CLP & COP Showing Their ‘Beta’ To Chinese Growth Expectations

LATAM FX
  • Amid last week’s broad Dollar strength, CLP and COP have been among the hardest-hit major currencies, selling off significantly versus USD.
  • While the scale of these moves has likely been exacerbated by thin liquidity in FX markets, and while in particular the market appears to be testing the FX intervention program in Chile and Chile’s relatively limited stock of FX reserves, the fact that Andean FX has been hit particularly hard this week is in line with our downside scenario analyses for EM FX from July, which showed that CLP and COP are particularly exposed to a wobble in Chinese growth expectations and commodity prices.
  • Going forward, domestic risks also remain for COP and CLP: Colombia and Chile each feature very wide current account deficits (including a recent reading of -8.5% of GDP in Chile), and few signs that inflation has been tamed even after significant hiking cycles (including another upside inflation surprise in Colombia in July).
  • Overall, GS continue to think that selloffs of CLP and COP pose a real challenge for policymakers trying to contain domestic inflation, and continued uncertainty around Chinese growth expectations and commodity prices could keep pressure on Andean FX.
  • For those looking to be long LatAm FX, Goldman prefer staying short EUR/MXN, which allows for exposure to high LatAm yields, but with a tighter connection to a still-strong US growth outlook, and somewhat less vulnerability to further wobbles in China or the commodity complex.
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