Bloomberg News

Chilean Peso Posts Biggest Winning Streak Since 2009 on Copper

October 12, 2011

Oct. 12 (Bloomberg) -- Chile’s peso posted its biggest winning streak in more than two years, reaching a three-week high as copper rose on investor optimism that Europe will contain its debt crisis.

The peso strengthened 2 percent to 499.21 per dollar, pushing through 500 per dollar for the first time since Sept. 21. The currency has gained 6.3 percent in the past week, the most among 25 major emerging-market currencies tracked by Bloomberg and the most for any five-day period since June 2009.

The price of copper, Chile’s principal export, has gained 13 percent to $3.3955 a pound for December delivery from a low of $2.994 reached on Oct. 3 at the Comex in New York. French President Nicolas Sarkozy and German Chancellor Angela Merkel vowed after a meeting on Oct. 9 to recapitalize European banks.

“The news about recapitalization of banks at the weekend has brought more confidence,” said Matias Madrid, chief economist at Banco Penta in Santiago. “The copper price is now above $3.30 again. Those are the two factors driving this.”

Foreign investors in the Chilean peso forwards market trimmed their net long dollar position against the peso to $6.1 billion on Oct. 7 from $6.5 billion on Oct. 6, according to central bank data.

Chile’s benchmark interest rate will fall to 4.5 percent next September from 5.25 percent now, according to the median forecast of 59 economists in a central bank survey published today. Interest-rate swap rates are pricing in steeper rate cuts than that.

The one-year interest-rate swap at 4.43 percent implies traders expect the average central bank rate between Oct. 14 2011 and Oct. 14, 2012, to be about that level, lower than the economists’ projections.

Bond Yields

Increased confidence has led to a selloff in Chilean central bank and government bonds as investors seek out higher yielding assets. The yield on a basket of five-year inflation- linked central bank bonds rose 19 basis points to 2.14 percent today. The yield has increased from 1.76 percent on Oct. 4. Interest-rate swap rates also climbed.

The two-year swap rate rose 9 basis points to 4.26 percent. The three-year swap rate in pesos jumped 14 basis points to 4.41 percent. Inflation-linked swap rates also climbed. The one-year inflation-linked swap increased 13 basis points to 2.04 percent.

Market Mood

“The big driver has been the better international scenario,” said Sebastian Ide, a fixed-income trader at Banco Santander Chile in Santiago. “The market mood has been better than last week. We have seen flows from active investors closing positions in Chilean interest rates and the curve has given back quite a lot of the risk premium that was there in recent weeks.”

While 17 of 20 economists in Bloomberg’s survey expect the central bank to hold rates unchanged at its meeting tomorrow, Larrain Vial SA chief economist Leonardo Suarez forecasts a 50 basis-point cut to 4.75 percent. Larrain Vial expects the benchmark rate to fall below 3 percent in March 2012, economists wrote in a note to clients yesterday.

Chile’s central bank sold $328 million of 10-, 20- and 30- year inflation-linked bonds.

The 10-year bonds paid a yield of 2.35 percent, the bank said today on its website. The 20-year bonds paid 2.75 percent, and the 30-year bonds paid 2.9 percent.

Banks bought 72 percent of the 10-year bonds while pension funds and others bought all of the 20-year bonds and 98 percent of the 30-year bonds. The 10-year bonds were 179 percent subscribed, the 20-year bonds were 194 percent subscribed and the 30-year bonds were 193 percent subscribed.

--Editors: Marie-France Han, James Attwood

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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