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CHILE: Morgan Stanley Extend Target on Chile Trade Recommendation

CHILE
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  • Morgan Stanley are revisiting their recommendation to receive 1y1y CAM versus SOFR and extend their target from the original 120bp to 160bp. MS believe that the priced-in policy rate gap between Chile and the US can continue to widen towards 200bp into end-2026, amid ongoing hurdles for the FOMC's easing cycle, tariff risks (and their implicit CLP impact), incipient de-anchoring in CPI expectations (as captured by the Traders Survey) and a more cautious shift in the BCCh's tone.
  • MS think that the main avenue for tightening (rather than widening) in this spread even from current levels involves shallower tariff announcements from the incoming US administration, which would trigger relief rallies across G10 and EM markets and potentially allow for a repricing lower of terminal rates across the board.
  • While MS remain bearish on CLP, they have closed their long USD/CLP trade, as technicals (especially positioning) are starting to look stretched (though not extreme yet). MS think that the risks for CLP are skewed towards higher volatility post-Jan 20 and into quarter-end, increasing the probability of a response from the central bank via additional FX liquidity, more likely in the form of NDF sales given the limited size of outstanding FX reserves.
  • Additionally, MS update on a new trade: receiving 10y COPxIBR versus SOFR.
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  • Morgan Stanley are revisiting their recommendation to receive 1y1y CAM versus SOFR and extend their target from the original 120bp to 160bp. MS believe that the priced-in policy rate gap between Chile and the US can continue to widen towards 200bp into end-2026, amid ongoing hurdles for the FOMC's easing cycle, tariff risks (and their implicit CLP impact), incipient de-anchoring in CPI expectations (as captured by the Traders Survey) and a more cautious shift in the BCCh's tone.
  • MS think that the main avenue for tightening (rather than widening) in this spread even from current levels involves shallower tariff announcements from the incoming US administration, which would trigger relief rallies across G10 and EM markets and potentially allow for a repricing lower of terminal rates across the board.
  • While MS remain bearish on CLP, they have closed their long USD/CLP trade, as technicals (especially positioning) are starting to look stretched (though not extreme yet). MS think that the risks for CLP are skewed towards higher volatility post-Jan 20 and into quarter-end, increasing the probability of a response from the central bank via additional FX liquidity, more likely in the form of NDF sales given the limited size of outstanding FX reserves.
  • Additionally, MS update on a new trade: receiving 10y COPxIBR versus SOFR.