Even optimists recommend caution on the Chilean peso

(Bloomberg) – The Chilean peso has been the best performer this year among Latin American currencies, but strategists suggest it may be good to wait before betting on the next tranche.

Due to an increase in covid cases, 75% of the country’s population is in quarantine and the Government decreed the closure of the borders. Political uncertainty has intensified and the recent rally in copper, the country’s main export, stalled. Against that backdrop, even strategists who are optimistic about the longer-term outlook say there is little reason for the currency to record further gains right now.

“Restricted mobility is not positive for the peso and is an obstacle to economic reopening,” said David Duong, director of currency strategy for Latin America at HSBC Securities in New York. “The pressures of border restrictions and lockdowns mean that it is difficult to see a rebound in the short term.”

The central bank has indicated that borrowing costs will remain at a historic low of 0.5% for “several quarters”, which means that the attractiveness of the peso for carry trade operations will remain weak, since Chile has one of the Lowest key rates in the region. Investors are also on the lookout for any possible political upheaval as a result of the April elections for the Constitutional Convention, after the government asked Congress to postpone the long-awaited vote.

The Chilean peso has risen more than 2% since the end of January, trailing only the South African rand among major emerging market currencies, although it is still slightly lower against the dollar in 2021.

The peso’s superior performance and uncertainty surrounding the upcoming elections could affect the currency in the “very short term,” Barclays strategists Pilar Tavella and Juan Prada said in a note published Wednesday. Future hikes depend on a stronger economic recovery or betting on possible rate hikes, they said.

Read more

In the long term, however, analysts say the peso could resume rising because the economy is in better shape than its neighbors. The central bank raised its growth forecast for this year on Wednesday and the rapid vaccination campaign could curb infections, ending the strictest restrictions.

HSBC’s Duong says it is “more optimistic” about the second half of 2021, while Morgan Stanley forecasts outperforming other Latin American currencies later in the year after an expected second-quarter decline of around one%.

“If we had a currency in Latin America, it would be Chile,” said Andres Jaime, director of macro strategy for Latin America at Morgan Stanley, based in New York. “When you think about longer-term prospects, Chile looks better positioned than the rest.”

Original Note: Even Chile Optimists Are Urging Caution on the Peso for Now

For more articles like this, please visit us at bloomberg.com

Subscribe now to stay ahead with the most trusted business news source.

© 2021 Bloomberg LP