Chile’s financial markets are closed today (October 27) for a national holiday. When they reopen – assuming international conditions have not deteriorated further – the Chilean peso should get a boost. However, with the dollar environment remaining strong, we doubt investors will want to chase USD/CLP well below the 900 level. This remains our target for the end of the year.
Chile’s swaps market should see decent appreciation at the short end of the curve. Operators had assumed that the CBC was aiming to bring the policy rate to 7.75-8.00% by the end of the year. These expectations may be reduced by 30 bps, perhaps 50 bps.
Chile’s measures also raise questions for some other banks in the region. Brazil also initiated rate cuts this summer and moved firmly toward 50 basis point rate cuts at each meeting this year. Brazil’s central bank will meet to set rates next week. The market now values cuts of 48 bp and 46 bp for the November 3 and December 14 meetings, respectively. The Brazilian real has held its value much better than the Chilean peso and its central bank may therefore be more tempted to go ahead with 50 basis point cuts this year, but the scale of the 2024 easing cycle could be reduced still. further.
Expectations regarding Banxico’s flexibility cycle were always valued more conservatively than in Chile and Brazil. But Chile’s more cautious move could cement the current understanding that Banxico won’t cut rates for another six months, unless the Fed’s cycle prices adjust sharply downward. And like others in the region, the terminal rate in Banxico’s easing cycle has already been revalued 150 bp more in the last three months.
Like Chile, Banxico also has a forward book settlement program underway at this time. As we notice When the plan to unwind its $7.5 billion dollar short position was announced in September, most of that liquidation would be concentrated in September and October. Mexico’s currency has generally performed better than Chile’s, and given that much of the recovery has occurred, we doubt Banxico will follow the CBC’s lead and scrap its own term book program.
Overall, high volatility in US interest rates has undermined the carry trade and weighed heavily on the high-yielding Latin American currencies that had been its beneficiaries. Unless the Fed can bring about some more benign conditions, we expect choppy conditions for USD/Latam to continue through the end of the year.