USD/CLP: Limited downside and expect a move back towards the 680 handle in the near-term - Rabobank

Christian Lawrence, Senior FX Strategist at Rabobank, notes that the USD/CLP has traded within a 40 peso range so far in the second half of this year, touching a low of 642.6 and a high of 682.2.

Key Quotes

“Price action has certainly been whippy with the highs and lows of the trading range hit multiple times. Indeed, since the start of this month alone we have seen USD/CLP tumble from 677.4 to 650.8, nearly a 4% move. This strengthening of CLP leaves it as the second best performing currency globally since the beginning of Q4 and the fourth best performer year-to-date (on a spot return basis). The outperformance of CLP came hand in hand with a sharp rally in copper that saw prices rise from around 220 USD/lb at the start of Q4 to north of 262 at the time of writing.”

“Although, as with all currencies, CLP has an almost unlimited number of drivers, we tend to focus on what we deem as four of the main factors key to CLP price action over recent years. These are, in no particular order, Chilean country risk (as proxied by the sovereign CDS), copper prices, general risk appetite (CLP depreciates when markets are scared), and interest rate differentials between Chile and the US which includes carry attractiveness. If we look at these four drivers we see that country risk and copper prices have helped push USD/CLP lower, while risk appetite and rate differentials have provided support for the pair. Of course, the first two drivers have been far more dominant. It is also worth noting that the fall in USD/CLP has come in the face of general broad-based support for USD in the aftermath of Trump’s election.”

“Going forward, we expect USD/CLP to head back up toward the top of the recent range around 680 in the coming months but looking further out we see room for further depreciation. This is driven by a number of factors including continued USD strength as the Fed looks to tighten while the rest of the world continues to ease, broad-based stress on EM and rising outflows on fears of a more protectionist stance from the US, weak global growth, Chilean rate cuts (around 50bp is priced in over the course of the next six months although we see the bias skewed towards more easing), and a slowdown in the rise in copper prices with a potential partial reversal of recent fortunes.”

“A look at EUR/CLP shows a more pronounced appreciation of CLP given the recent slide in EUR/USD as political fears, Eurozone event risk and further easing from the ECB (EUR 60bn nine month extension to the asset purchase program) have all weighed on EUR, while USD has found broad-based support on rising US yields in the aftermath of Trump’s election to the White House. Longer term, the fate of EUR will be very much dependent on political risk with Dutch elections in March, French elections in May and German elections in October.”