Main Risks for CLP: Rising Political Uncertainty and Falling Chinese Liquidity

• In the past year, we have seen that the CLP has been one of the best performers in the EM FX world as risk on environment combined with the sharp recovery in copper have led to a strong demand for the peso.
• However, the recent political turmoil has generated a sharp correction on the CLP, which was down 7% against the USD from peak to trough (CLP is still up 20% against the USD since its March 2020 low including the recent selloff)
• Investors have been questioning if the selloff will be temporary and the momentum will resume as developed economies prepare for global reopening and EM vaccination campaign accelerates. We have also seen that copper has entered a ST consolidation with front months futures down 7% since May 10.
• Another important risk for commodities heavily relying on Chinese demand such as copper (and therefore a risk for CLP) is the sharp contraction in Chinese liquidity since the start of the year. Historically, tightening Chinese credit and liquidity conditions have generally led to a correction in global asset prices (with a 6 to 9 months lag).
• USDCLP reached a high of 737.50 on Tuesday as CLP received strong support slightly below its 200D SMA at 742.80; next resistance to watch on the topside stands at 750. On the downside, first support stands at 718.90 (100D SMA), followed by 712.50 (50D SMA); key support remains at 700.

Source: Bloomberg/MNI