Bloomberg News

Chilean Peso Posts Biggest Loss Since Lehman on Copper Rout

September 30, 2011

Sept. 30 (Bloomberg) -- Chile’s peso posted its biggest monthly drop since Lehman Brothers Holdings Inc. collapsed as a slump in copper dimmed trade prospects for the metal’s biggest producer.

The peso sank 1.3 percent to 519.75 per U.S. dollar at 12:29 p.m. New York time from 512.78 yesterday, the steepest decline among 25 emerging-market currencies tracked by Bloomberg after the Czech koruna. Chilean rate swaps plunged on expectations of lower interest rates.

The peso’s 11 percent slump this month, the biggest since October 2008, trails the 24 percent fall in the price of copper as commodities entered a bear market on concern global growth is slowing. Copper accounts for more than half of Chile’s exports.

“The peso could fall further as the threat of a breakup of the euro-zone moves copper lower, or if the central bank cuts interest rates on lower growth,” Leonardo Suarez, chief economist at Larrain Vial SA, said today in an interview in Santiago. “All the variables point to depreciation.”

Chile’s three-month interest-rate swap plunged eight basis points, or 0.08 percentage point, to 5.04 percent, the lowest level since May. The six-month swap rate fell 16 basis points, the most in six weeks, to 4.67 percent.

The one-year swap fell 12 basis points to 4.32 percent, the lowest since January. The central bank has kept its key interest rate unchanged at 5.25 percent for the past three months after raising rates at five straight meetings.

Rate Expectations

Interest-rate expectations have declined this week after central bank officials said they were prepared to act “aggressively” to fend off an external crisis. Central bank policy maker Rodrigo Vergara said Sept. 28 the bank has “the tools, the will and the space to act.” His comments were echoed yesterday by bank President Jose De Gregorio, who said policy makers’ base case scenario that rates would remain unchanged shouldn’t be interpreted as a commitment and that the bank was prepared to change rates at any time.

The peso’s decline in the third quarter is 10 percent, outpaced by a 15 percent decline in the Mexican peso and a 16 percent fall by the Brazilian real. The peso fell less than other regional currencies earlier this quarter as local pension funds repatriated assets from abroad, buoying the currency.

Chilean pension funds cut their dollar hedges by almost $9 billion to $15.5 billion by the end of August from $24.4 billion at the end of May, central bank data shows.

Foreign investors in the Chilean peso forwards market trimmed bets on the U.S. dollar beating the peso to $4.8 billion on Sept. 28 from a 14-month high of $5 billion on Sept. 26, according to central bank data.

‘Flight to Quality’

“A large part of the explanation is copper, and a flight to quality,” said Eugenio Cortes, head of currency forwards at EuroAmerica Corredores de Bolsa SA. “As long as there is fear and tension, the tendency will be for the peso to fall.”

Copper for December delivery fell 5.95 cents, or 1.8 percent, to $3.1865 a pound at 12:25 p.m. on the Comex in New York. The metal for delivery in three months dropped 1.9 percent on the London Metal Exchange.

The extra yield, or spread investors demand to buy Chile’s 3.875 percent bonds due in 2020 instead of U.S. Treasuries increased 76 basis points to 158 basis points from 82 basis points during the third quarter, according to Bloomberg prices.

The spread on state-owned refiner Empresa Nacional del Petroleo’s 5.25 percent bonds due in 2020 widened 105 basis points to 305 basis points from 200 basis points. The spread on state-owned copper miner Codelco’s 3.75 percent bonds due in 2020 increased 61 basis points to 201 basis points today from 140 basis points on June 30.

--With assistance from Matthew Craze and Eduardo Thomson in Santiago. Editors: James Attwood, Glenn J. Kalinoski

To contact the reporter on this story: Sebastian Boyd in Santiago at sboyd9@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net


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