Bloomberg News

Chilean Peso, Swap Yields Jump After Europe Boosts Rescue Fund

October 27, 2011

Oct. 27 (Bloomberg) -- Chile’s peso rose the most in more than two years and interest-rate swap rates spiked after European leaders agreed to boost their rescue fund and persuaded bondholders to accept 50 percent writedowns on Greek debt.

The peso jumped 2.3 percent, the most since April 2009, to 489.9 per dollar, from 501.11 yesterday. The three-month interest-rate swap rate rose nine basis points to 5.2 percent as of 1:47 p.m. in Santiago. The six-month rate rose 20 basis points, or 0.2 percentage point, to 5.08 percent.

“This is absolutely a reaction to what is happening in Europe,” said Andres de la Cerda, a money markets trader at Bice Inversiones in Santiago. “It will continue as long as people believe that news out of Europe is positive.”

Copper for December delivery gained 5.9 percent to $3.6970 a pound. The metal accounts for half of Chile’s exports and the currency has been closely tracking prices for the metal since the start of October.

The 60-day correlation between Comex copper prices and the Chilean peso reached the highest since 2008 yesterday.

The peso has gained 6 percent in the past week, outpacing all the other currencies in the region tracked by Bloomberg. The Mexican peso, the second-strongest over the last five days, has appreciated 4 percent.

“The Chilean peso is the star performer because of copper,” said Roberto Melzi, a local markets strategist at Barclays Capital in New York. “It has additional support. If you expect a soft landing in China then the Chilean peso is clearly going to benefit from that.”

Forwards Market

Foreign investors in the Chilean forwards market had a $5.2 billion long U.S. dollar position on Oct. 25, according to central bank data published today.

The three-month swap rate at 5.2 percent suggests traders are betting on a 25 basis point cut to the central bank’s benchmark lending rate to 5 percent on Jan. 12, according to Bloomberg calculations.

Interest-rate swaps are pricing in between 80 and 85 basis points of rate cuts in the next 12 months, according to Melzi. Barclays continues to expect 100 basis points, or 1 percentage points, of rate reductions, he said.

“The market is completely repricing,” he said. “We’re not sure if that’s the correct result, but the market is interpreting this as if the risk is contained.”

The pace of price rises priced into the inflation forwards market for next year rose today. Inflation forwards are discounting 2.62 percent inflation in the 12 months through December 2012, up from 2.5 percent yesterday and 2.41 percent a week ago, according to Bloomberg calculations.

Wholesale gasoline prices in Chile are due to rise between 1.1 percent and 1.7 percent today, state-owned refiner Empresa Nacional del Petroleo said in an e-mailed statement Oct. 26.

--Editors: Glenn J. Kalinoski, Marie-France Han

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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