Chilean peso. Having sold large quantities of US dollars from its sovereign wealth fund to finance covid-related expenditures, the whittling away of fiscal buffers casts a shadow over Chile’s public finances. Furthermore, the campaigns for a new president and constitution are likely to keep foreign investors somewhat wary of Chilean securities.
The Chilean economy and the peso are particularly sensitive to the price of copper, which accounts for over 50% of Chile’s total exports. While copper prices are strong for now, supporting the peso, it remains to be seen whether prices can rise much from current levels. Also worth mentioning is Chile’s increasing dependence on Chinese demand, which accounted for 35% of its exports in June 2019 (essentially copper). Consequently, Chile is vulnerable to a slowdown in China.
Overall, although the central bank’s hawkishness (it raised the policy rate by 225 basis points between July and October) and strong copper prices may help support the peso in the short term, we see limited scope for sustained peso outperformance in the months ahead.
Our projections for the USD/CLP rate are CLP800 in three months, CLP820 in six months and CLP840 in 12 months. Overall, we are relatively cautious on the Chilean peso. Colombian peso. Having underperformed in the first half of this year, we see scope for some short-term outperformance of the peso. However, the medium-term outlook remains cloudy, notably because of Colombia’s high current-account deficit and debt-to-GDP ratio.
Having raised its policy rate by 25bps (to 2%) at the end of September, the Colombian central bank seems poised to raise rates further. Some abatement of covid concerns has also been helping the local currency. The current rise in energy prices is also providing temporary support to the peso. For all these reasons, we see scope for the undervalued Colombian peso to perform well in the next few months.
Nevertheless, the central bank may be reluctant to push the policy rate above its neutral rate (which it estimates to be around 4.5%) as long as the economic situation is not totally normalised. In short, it could end up being less hawkish than other EM central banks. And we expect a more balanced oil market in 2022, reducing support for the Colombian peso from this source, so Colombia’s current account deficit (4.5% of GDP on a rolling annual basis) may persist.
Overall, our projections for the USD/COP rate are COP3,700 in three months, COP3,850 in six months and COP3,950 in 12 months.
