FxWirePro: CLP underperformance upside down - Deploy USD/CLP NDFs to hedge

Stay short in 3m USDCLP NDF: Sell USDCLP 3m NDF at 672.85 with the target at 640 (5.1%) and stop above the top end of the range at 684 (-1.65%). The trading horizon is 3 month and it offers a positive carry of 13bp/month.

The above trade is advisable as the CLP underperformance should reverse, we remain constructive on EM FX in the coming months on growth momentum, slow policy normalization and continuation of inflows. CLP is the worst performer in EM currencies this year; EM currencies have appreciated on average by 4% whereas USDCLP is trading at the top of the one-year range (640-680).

It should face strong resistance at the upper end of the range (680) so current levels offer an attractive entry point. GDP is expected to bottom out and improve to between 2.0% - 2.5% over the next four quarters with the reopening of Escondida copper mine in March.

Additionally, we also expect copper prices to move higher by year-end which is important since copper represents 50% of Chile’s exports. Inflation is likely to hover around 3% in 2017 and 2018 and easing cycle is likely over with improving growth; we expect next rate move to be a 25bp hike in Q2 2018. China is the biggest trading partner for Chile, and the CNY carries 28% weight in the REER index. The recent rally in the CNY could translate into CLP gains against the USD.

Risks Growth slowdown, dollar strength If Chilean, or Chinese growth slows down meaningfully, or if the dollar starts strengthening, the CLP could come under pressure.