Goldman Sachs: Recommend Short EUR/CLP for High Carry, Moderate Risk

Goldman Sachs: Recommend Short EUR/CLP for High Carry, Moderate Risk, and Room to Run

• Over the past year, a rapid hiking cycle has helped to drive a nearly 6% increase in nominal CLP carry. And, while the Peso has strengthened in recent weeks, GS metrics suggest that more than 15% FX risk premium remains priced into the CLP: more than they measure during the civil unrest and constitutional crisis of 2019.
• GS recommend going short EUR/CLP with an opening level of 100, a total return target of 108, and a stop of 96. A short EUR/CLP view features 6.9% carry on a 12-month nominal basis; if achieved in 3 months, their 8% total return target roughly corresponds to a EUR/CLP spot level of 885, which is approximately half-way to the sub-840 levels reached in April of last year.
• Relative to other ways of funding CLP longs (especially Dollar funding), going short EUR/CLP features an attractive combination of high carry, moderate volatility, and some insulation against key global risks, such as rising US yields, and a fall in Chinese growth expectations.
• The key source of short-term volatility remains domestic uncertainty. Price action over the past month reflects some mild easing of investor concern around left-tail risks in Chile.
• However, cabinet nominations in coming weeks will be important, and with new text scheduled to be drafted and ratified through mid-year, Chile's Constitutional Convention will likely keep risk premium from being entirely unwound in 2022H1.