USD/CLP likely to move between 650 and 700 - BBVA

According to the Research Department at BBVA, too much appreciation of the peso delays the economic recovery. They see USD/CLP most likely to move in a range from 650 to 700 over the next few quarters.

Key Quotes:

“In Chile, the peso went through a period of depreciation closely linked to the fears generated by Brexit. However, although this risk has been allayed, it has returned to levels not seen since midway through 2015. This development coincided with a significant surge in interest rate arbitrage transactions using derivative instruments (carry trade) for some US$2.5 trillion, eloquent testimony of global investors’ appetite for a partly recover the exposure to the greater nominal yield now offered by higher local interest rates.”

“In the recent economic situation the Chilean peso has been favoured, even rather more than the currencies of Chile’s trading partners, as shown by the CLP’s multilateral appreciation, which is also to some extent due to the significant appreciation of the Brazilian real, in which we have also seen carry trade transactions in parallel with those in the Chilean peso.”

“From the assessment of the exchange misalignment we deduce that the appreciation of the peso was significant and somewhat higher than suggested by the fundamentals. We do not however believe there would be room for fundamental depreciation taking the exchange rate above 700 pesos to the dollar, nor that cyclical conditions support a nominal exchange rate consistent with a real exchange rate at or below its historical averages as is the case with the most recent.”

“We consider that the rate of exchange should remain at levels above its historical averages in order to facilitate the reallocation of resources to exporting sectors other than mining and so allow recovery of the investment in commercial goods and services sectors. Support from monetary policy, justified certainly by medium-term deflationary

effects, might be necessary. Indeed, the Central Bank has already stated that the recent appreciation does not favour economic recovery, rather there is a risk of a delayed monetary policy response that will end up slowing down recovery.”

“In the short term, due to the high volatility of the global financial markets, we do not rule out further depreciation of the CLP, which could bring the rate back to levels of around 700 to the dollar, but we do not consider that the conditions would exist for working permanently with those levels. The most likely range would be from 650 to 700 pesos to the dollar over the next few quarters.”