Wednesday, November 18, 2015

Chilean assets to underperform affected by copper prices – BBH

FXStreet (Córdoba) - According to analysts from Brown Brothers Harriman, its EM FX model showed the Chilean peso (CLP) with some of the weakest fundamentals among EM.

Key Quotes:

“Despite strong fundamentals, Chile continues to be buffeted by lower copper prices and generally negative sentiment on EM. We expect Chilean assets to continue underperforming until the outlook for copper stabilizes.”

“Bachelet has tilted more left in her second term, after governing from near the center in her first term from 2006-2010. Her two economic priorities when campaigning were education and fiscal reforms. While many were concerned about her plans to increase corporate taxes, we think that the bearish commodity story is the biggest challenge ahead.”

“The policy outlook is being complicated by the renewed slide in copper to new cycle lows, which will weigh on growth ahead. “

“With copper making new cycle lows and on target to test the 2008 and perhaps even the 2001 lows, USD/CLP is likely to continue making new cycle highs on the way to testing the all-time high near 760 from October 2002. Our EM FX model shows the peso to have some of the weakest fundamentals in EM.”

“Chilean bonds have held up OK this year. The yield on 10-year local currency government bonds is +58 bp YTD. This is in the underperforming camp, and compares to the worst performing group that includes Brazil (+309 bp), Turkey (+184 bp), Peru (+169 bp), and Colombia (+118 bp). With inflation likely to fall and thus keeping the central bank from being too hawkish, we think Chilean bonds could start outperforming.”
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