Following the poor result for government parties in the weekend’s vote on the composition of the Constituent Assembly, economists at Credit Suisse continue to hold 700 as their USD/CLP target. They expect support from copper prices to persist – with the miner royalty tax bill adding to upside risks for the trade balance.
CLP stays resilient as BOP support overwhelms political risks
“The large defeat suffered by government coalition parties, but also by traditional centre-left parties, at the hands of independent and more progressive candidates in the Constituent Assembly vote was mirrored by an equally poor performance by mainstream parties in local elections. Crucially, government coalition failed to secure the 37 seats it needed to wield veto power in the Constituent Assembly, to override progressive measures supported by a potential 2/3 majority.”
“We had been targeting 700 in USD/CLP, below which we thought that either an improvement in the political risk picture or expectations of a hawkish shift in monetary policy expectations was needed in order for us to consider extending our target lower. The events of the past week have certainly not moved in that direction, with the vote leading to a deterioration in political risk, and with the central bank failing to acknowledge inflation risks in a forceful way. This suggests that for now 700 still stands as a valid near-term target.”
“We continue to keep a close eye on the bill for increased miner royalties, which passed a key vote in the Lower House on 6 May. While progress towards finalizing the bill is likely to be viewed with ongoing apprehension by investors, we suspect that the FX implications will be more mixed, especially in the event that these concerns were to translate into reduced copper mining capacity expansion, and therefore feed into further appreciation potential for copper spot prices. The obvious flipside to this argument is that a sudden retracement in copper prices could prove quite detrimental to CLP: we do not dismiss this argument, but note for the time being it does not appear particularly urgent, with demand still rising and supply under pressure.”