- Chile: ‘Only’ a 50bps cut, suspension of USD purchases and reduction in NDFs
A small beat in Tokyo inflation (with limited impact) was the overnight highlight as Asia markets head quietly into the weekend—as will those in Europe and the US (for the most part). The mood looks ok, with SPX futures up 0.6% (thanks to e.g. Amazon results) recovering some of Thursday’s 1.2% cash drop. This contrasts to a 0.5% drop in French equities as Sanofi takes a 15% hit on an earnings miss and expected decline in profits, against a 0.5% rise in the DAX, to have the broader Euro Stoxx 50 marginally higher.
Oil is up about 2.1%, better than copper’s 1% rise and on par with iron ore’s 2.2% gain on Chinese stimulus tailwinds. We may see oil drift higher and yields grind lower throughout the day as traders build in caution ahead of the weekend when anything goes regarding the war in Israel—as has been the case the past two Fridays. At writing, USTs are bear steepening, compared to a more mixed across the curve bid of 2–4bps in German debt.
In FX, the USD is trading weaker against most majors, with its losses occurring in European trading; here, again, there’s a chance of a haven-seeking bid for the USD (and CHF) today. The MXN is so far enjoying the peace and quiet to track a 0.3% gain to trade around 18.10 pesos, at writing.
We have a very quiet day ahead in Latam, and Chilean markets are closed for holidays so we won’t see the reaction to yesterday’s surprisingly small BCCh rate cut (see below) until Monday—and by then global market drivers may complicate the interpretation of moves (especially further out the curve). The G-10 highlight is the release of US PCE inflation and personal income/spending at 8.30ET, with a focus on the core component of inflation which was teed up to possibly be a touch softer than expected by the GDP release yesterday. The U Mich survey final results may deliver sizable revisions in inflation views that triggers some choppiness in markets.
—Juan Manuel Herrera
CHILE: ‘ONLY’A 50BPS CUT, SUSPENSION OF USD PURCHASES AND REDUCTION IN NDFS
- BCCh on high alert: external scenario the main determinant of monetary policy with strong dependence on Fed and exchange rate developments
On Thursday, October 26th, the Central Bank (BCCh) cut the benchmark interest rate by 50bps, surprising both the market and our expectations. In addition, the BCCh suspended USD spot market purchases (reserve accumulation program) and will begin rolling over outstanding forward FX holdings. Undoubtedly, the BCCh is concerned about the recent depreciation of the Chilean peso (CLP), which keeps the real exchange rate (RER) at the high end of the range estimated by the authority as equilibrium (spot RER: 106 pts; equilibrium range: 93–106 pts). The decision is based on a deterioration of the external scenario, which implicitly acknowledges the BCCh’s fears about the inflationary pressures that would be generated by the depreciation of the CLP above its equilibrium level.
The domestic scenario would be evolving in line with the IPoM in terms of GDP, affected, as we have pointed out at Scotiabank, by specific factors in education. In September, we would see a m/m GDP growth due to the reversion of said shock and the favourable effect of electricity generation and mining. In inflation, the BCCh recognizes the core disinflationary surprise accumulated in the last two months. Certainly, the domestic scenario is not responsible for putting monetary policy on high alert. It should be recalled that, as of October 26th, the BCCh completed purchases in the spot market for USD 3.68 bn (USD 10 bn announced), while maintaining a stock of FX forwards for USD 2.7 bn.
All this is due to an external scenario in which a deterioration of financial conditions and higher geopolitical risks with depreciating effects on the CLP are expected. In fact, the Board’s main concern would have to do with the global appreciation of the USD as a consequence of a more prolonged restrictive monetary policy, where further Fed Funds Rate hikes are not ruled out. This scenario, together with the volatility of commodity prices in response to increased geopolitical risks, raises concerns about the level of the exchange rate and the inflationary effects it could have domestically. At the September meeting it was acknowledged that the narrowing of the interest rate differential was the main factor behind the depreciation of the CLP, a fact that was undoubtedly also behind the decision taken by the BCCh.
Looking ahead to the next meeting on December 19th, the exchange rate scenario could change drastically depending on the outcome of the December 17th plebiscite. Although we consider that the 50 bps drop could condition an acceleration in the pace of cuts for the next meetings, we do not rule out that in a scenario of strong appreciation (depreciation) of the CLP in response to the plebiscite result, the BCCh will resume a higher (lower) pace of cuts that will bring the reference rate closer (further) to the range between 7.75 and 8% indicated by the Board a few weeks ago. Given that the BCCh would be in charge of pointing out that the exchange rate is for now the main driver of monetary policy, a relevant appreciation would be enough to accelerate declines if it acts symmetrically.
—Aníbal Alarcón
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