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JP Morgan: 50BP Cut Could Fuel Additional CLP Weakness

CHILE
  • JP Morgan’s economist expects BCCh to cut the policy rate by 25bp to 5.75%, with the market currently evenly split between 25bp and 50bp.
  • A 50bp cut this time could fuel some additional weakness in the peso, with Chile finally having a monetary policy rate in line with the US.
  • Amid a worsening backdrop for Latam currencies and a clean slate in terms of CLP positioning, JPM think CLP could revisit the lows of the beginning the year. Valuations are slightly rich now, standing out in a context of generally cheap Latam currencies, whereas positioning is clean and there is room for offshore investors to rebuild their CLP shorts.
  • May’s inflation print was slightly above expectations, but expectations remain anchored at 3%. Economic activity slowed down in recent months, but 1Q was strong and JPM maintains an annual GDP projection at +2.7%y/y, above potential. The behaviour of inflation and economic activity amid a more volatile external backdrop adds uncertainty to the next meeting.
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