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Goldman Sachs Say Two Factors Driving CLP Underperformance

CHILE
  • Goldman Sachs have revised their USD/CLP forecasts higher to 925, 900 and 875 in 3-, 6- and 12-months (from 775, 770, 770 previously). While part of the CLP weakening reflects the broader EM FX depreciation in response to higher US yields and weaker risk sentiment, Goldman Sachs think there are two Chile-specific factors driving the underperformance.
  • First, the moves in commodity prices over this period has been especially negative for Chile’s terms of trade, given the divergence between copper and oil prices. Looking ahead, GS think terms of trade will continue to negatively impact the currency as their commodities strategists forecast an increase in oil prices and expect destocking headwinds to weigh on copper in the near-term.
  • Secondly, monetary policy has remained a drag for the FX, with a significant pace of real rate erosion as well as the central bank’s reserve replenishment programme. While the Board had initially noted that changes in market conditions could lead to an adjustment in the programme, no adjustments have been made so far despite the sharp FX weakening. However, official commentary last week suggests that the Peso’s depreciation will be taken into account at this week’s monetary policy meeting.
  • GS economists expect the BCCh to cut rates by 75bps to +8.75%. And, with one additional meeting after that, they think the BCCh is likely to stick to the higher end of their guidance for rates by year-end at 7.75-8%. Barring an improvement in broader risk sentiment, GS think that a more cautious stance would be needed to effectively counter depreciation pressures on the Peso. This could take place through a slowdown in the pace or a halt to FX purchases or clearer guidance that the pace of rate cuts will be slowed as the gap with US rates shrinks.
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