BUY OR SELL-Which Chilean assets to hold after FX action?

* Inflation expectations on the rise after FX intervention

* Investors buying inflation protection, stocks

* Peso, government bonds to sell off

By Walter Brandimarte

NEW YORK, Jan 4 (BestGrowthStock) – Chilean assets offering
protection against inflation have become a favorite among
investors after the government said on Monday it will intervene
in the currency market to curb the strength of the peso.

The outlook for stocks remains positive, especially for
exporters which should benefit from a weaker currency in the
short term.

Meanwhile, the peso is poised to weaken a little further
but it could resume its appreciation trend later in the year if
commodity prices remain on the rise.

Chile’s central bank said late on Monday it would buy $12
billion this year to tame the peso, which has gained more than
17 percent against the U.S. dollar since the end of June.

Here is a compilation of the main trade ideas floated by
analysts following the announcement:

BUY

* Protection against inflation

Inflation expectations are on the rise as a weaker peso
will translate into higher prices of imported goods in the
short term. In the longer run, investors are also likely to
demand a higher inflation premium on government bonds if
expectations of a pause in the cycle of monetary tightening are
confirmed next week.

“If you interrupted your rate hike cycle, and you
interrupted your peso FX appreciation, clearly the markets are
going to demand a higher policy risk on the (country’s yield)
curve,” said Siobhan Morden, head of Latin America research and
strategy at RBS Securities.

Morden says her favorite investment in Chile is the long
two-year break-even inflation trade. Break-even inflation is
the difference between the nominal yield on a fixed-rate
investment and the real yield on an inflation-linked investment
of similar maturity and credit quality.

Rates on that trade jumped to around 3.65 percent on
Tuesday from 3.55 percent in the previous session and are
poised to rise further, Morden said.

* Stocks

Chilean stocks in general should benefit from an expected
pause in the central bank monetary tightening cycle, which
analysts see as a complementary measure to stem the currency
appreciation.

Miners should post a good performance as the global outlook
for commodities remains positive.

“Companies related to the exporting sector and with
regional exposure should boost the local stock market,”
Santiago-based brokerage BCI said in a report.

Chile’s blue-chip IPSA index (.IPSA: ) rose 0.9 percent on
Tuesday while the broader IGPA index (.IGPA: ) gained about 0.8
percent.

SELL

* Peso

The peso (CLP=: ) sank about 4.5 percent on Tuesday, to
487.60 per U.S. dollar, following the intervention
announcement. It is poised to weaken a little further before
stabilizing at weaker levels and eventually resuming its
appreciation trend, especially if commodity prices remain
strong.

Most analysts say the peso could weaken to near 500.00 per
dollar in the short term. Many see attractive entry points
around that level, however.

“JP Morgan house view is bullish on commodities and copper
in particular. If that outlook proves to be right, sellers of
USD/CLP may surface if the currency trades above the 500
level,” JP Morgan analyst Felipe Q. Pianetti wrote in a
research note.

* LONG-DATED BONDS

Chile’s domestic yield curve is expected to become steeper
as inflation expectations rise and the central bank sells more
bonds to sterilize its dollar purchases.

Yields on Chile’s peso-denominated bonds maturing in 2020
(CL00001265=RRPS: ) rose 36 basis points to 6.458 percent,
according to Reuters data.
(Additional reporting by Brad Haynes in Santiago; Editing by
Leslie Adler)

BUY OR SELL-Which Chilean assets to hold after FX action?