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Morgan Stanley Close USDCLP Long, Look To Re-Engage On Dips

CHILE
  • Morgan Stanley have closed their USDCLP Long as the pair currently hovers around the original target of 955. While they continue to foresee the path of least resistance as higher for USDCLP, “given a lack of immediate catalysts and imminent Hacienda sales, we prefer to wait for a slightly lower level (940 or below) to re-engage”.
  • MS highlight the currency's main issue is the extremely fast erosion in carry over recent months, both on an outright basis and relative to peers, turning CLP into a favourite funding currency for other longs in the region, such as MXN, BRL or COP, in addition to an attractive short versus USD outright.
  • Regarding further weakness and the potential for the central bank to act, MS believe verbal intervention is more likely for now than outright FX intervention, which would require more stress in their view “as FX volatility today is significantly more contained relative to the prior two episodes”. While MS do not think that the BCCh targets a specific spot level (and REER is likely more important), they add 1,000 remains an important psychological level for markets.
  • The piece also notes that recent front-loading of USD sales triggered very temporary FX relief. MS expect this to remain the situation. The government has already finalized its 2024 USD bond issuance (US$1.7 billion), the lowest amount since 2019. MS see more limited CLP support from Hacienda sales this year relative to prior years.
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