Trade: Short USDPEN – Entry: 3.68, Target: 3.55, Stop-loss 3.74
Trade Rationale: We see potential for a squeeze in offshore positioning that remains stretched long USDPEN, particularly as the BCRP maintains a more cautious approach to adjusting its policy rate despite continued reversions in inflation on all measures (headline – below 2% and heading towards 1%; core – heading to 2%; and 12m expectations continuing to revert lower towards 2.0%). The BCRP is approaching the neutral real rate for this cycle. The current ex-ante policy rate is 2.38%, while neutral is estimated at 2.00% with the potential for this to be a notch higher at 2.25%. With the decision last week by the BCRP to stand pat, the implied real policy rate spread to the US has widened from about 80bp to 88bp. Shifts lower in inflation expectations for Peru and a slower pace of rate cuts are likely to keep that spread sustained or higher, supporting the PEN. The country’s trade balance also remains very strong, adding additional fundamental support for the PEN. Off the back of solid profits from the mining sector, the PEN is also likely to enjoy supportive monthly tax flows through this week and through the special tax season in March as corporates convert parts of their USD profits into the PEN to pay their taxes. Lastly, USDPEN exposure by local banks has shifted meaningfully back towards short USDPEN over the past 7-8 months. This positioning indicator appears to lead USDPEN moves by about 7-8 months. We continue to see the PEN as a relatively safe haven in the LatAm region.