The worst performing major currency may finally get a lifeline

The currency has fallen more than 2% in August ahead of the presidential election in November – the biggest drop among 32 peers tracked by Bloomberg. This has reduced its decline to about 8.7% over the past four months – more than twice that of any other major currency except the Peruvian sol.

However, in the next month, economics may beat politics. Policymakers are expected to raise the key rate by half a point late Tuesday, the biggest increase in a decade. And with the boom in retail sales at a fever pitch, some are even considering a 75 basis-point increase, something that hasn’t been seen in Chile since 2001.

Chile’s August retail sales rose 62.2% year-on-year, beating the consensus estimate of 59.8%. Add to that the falling Covid cases and the reopening of the economy, the currency’s worst days could be behind it.

“The central bank has fallen behind the curve and there are clear signs that the economy is warming,” Goldman Sachs economist Alberto Ramos wrote in a report.

According to the report released on Friday, the bank offers a 65% probability for a 50 basis-point increase to 1.25% and a 10% higher growth potential.

Catch

What’s more, the central bank is likely to continue raising rates next year as it grapples with the sharpest inflation rate since 2016, providing further strength to the peso.

The swap now costs the policy rate over 3.25% over 12 months, which means an increase of over 250 basis points. Economists surveyed by the central bank are more cautious, predicting the key rate at 2%.

Expectations of a correction in copper prices, as well as a sharper pace of hardening, could help the peso consolidate its 50-day SMA near $763 per dollar. The currency has been trading on the weaker side of that average since mid-May.

Copper, which accounts for half of Chile’s exports, climbed 0.8% in London on Tuesday, raising its profit this year to 22%.

opening

Another positive development comes as Covid infections fall, with the government lifting almost all lockdown restrictions in the capital Santiago over the weekend. Investors should take note of the biggest rally in the Thai baht last week in 14 years, after the government announced the lifting of some semi-lockdown restrictions.

Citigroup on Monday turned neutral on the Chilean peso in its EM bond portfolio, which was previously underweight. According to Citigroup analysts led by EM Fixed Income Strategy Head Dirk Willer, the currency’s real effective exchange rate has been undervalued relative to copper since the end of 2019, and the performance gap has widened in recent weeks.

Analysts at Citi say that “abnormal depreciation” has a major impact on inflation and could prompt central banks to be more stringent.

Others are more cautious. RBC Capital Markets preferred to short the peso, citing the risk of an election reflecting growing support for the Left ahead of the November election. RBC says the central bank may act “more prudent” on disappointing market expectations at its meeting.